Forming an Limited Liability Company “LLC”
An LLC, or limited liability company, is a term used to describe a private limited company. LLCs, along with LLPs, are relatively new forms of business organization in the United States. In particular, LLCs have gained much traction and popularity in the United States because of the many perks they offer over other, perhaps more traditional, forms of business organization. They carry with them very few disadvantages and as such, for many businesses an LLC is an idyllic means of conducting business. If you are considering which form of business is best for your new venture, or if you are considering changing your business to an LLC, it is definitely worth taking a few minutes to read on about their potential benefits to your business.
Benefits of Forming a Limited Liability Company
Many of the perks and benefits that a limited liability company offers stem from its unique status as a hybrid form of business organization. This hybridity allows for it to offer the benefits of limited liability like a corporation, while also simultaneously providing the tax advantages of a partnership. Essentially, an LLC can dip in between both types and offer dual benefits to its member-owners. As a result of these dualities, many businesses favor becoming an LLC, a trend that is only further encouraged by state statutes permitting and simplifying their establishment and longevity.
Difference Between Corporations and LLCs
Insofar as questions of jurisdiction, LLCs share many traits with corporations. Like corporations, LLCs are creatures of the state. As such, they are formed and operated in accordance with state laws. Furthermore, both corporations and LLCs are treated as legal entities separate and distinct from their owners, who are instead referred to as ‘members’. Given their status as a legal entity, LLCs can sue or be sued, enter into contracts and arrangements, and hold titles to property or estates.
Members of LLC vs. Shareholders of Corporation
Notably, the members of an LLC enjoy limited liability just like the shareholders of a corporation would. Members can also undertake actions on behalf of the LLC, and as with a corporation’s shareholders, any damages or charges recovered go to the LLC, not to the members themselves. However, just like how courts can, on occasion, determine that they ought to disregard a corporation as a legal entity and hold shareholders personally liable for damages, so too can the courts pierce the corporate veil of an LLC to hold individuals accountable for damages. These cases, however, are extremely rare and far and few between.
Disadvantages of Forming a Limited Liability Company “LLC”
As previously alluded to, the advantages of LLCs are many and the drawbacks are relatively few. One such disadvantage to consider is that the management structure of an LLC is not clearly stated nor defined in the legal literature. More often than not, it is up to the members to create, agree upon, and sign off on articles of organization which outline the key rules and principles of operation of the company. While, this may seem inconvenient at first, it can actually be viewed as a major advantage of an LLC, speaking to its flexibility and the level of freedom and control it can offer to its members. Below is a chart that effectively sums up the potential pros and cons of an LLC.
Things to Consider About LLCs:
- Liability of members is limited to the amount of their investments
- LLC statutes are not yet completely uniform among all the states; some differences in liability or responsibility may apply
- Can choose whether to get taxed as a partnership or as a corporation
- Lack of case law with LLCs means that lawsuits are a little more nuanced
- If taxed as a partnership, can avoid “double taxation”
- Investors may not feel as comfortable investing in LLCs as corporations because of the above reason
- LLC itself isn’t taxed, profits get “passed” onto the members who only pay personal taxes
- Articles of organization should be drafted and agreed upon by members, which can be a little cumbersome
- Immense flexibility with internal organization
- California, and some other states, levies a minimum yearly fee of $800, which the LLC must pay to enjoy limited liability
- General ease of doing business in other states
- Can consistent of one or many members
- Far more flexibility and far less documentation needed for LLCs than for corporations
How Does an LLC Work
As you can see, the benefits of an LLC generally outweigh the drawbacks. For further information, use the following chart as a reference; it provides answers to many common questions surrounding the details of how an LLC works.
A Limited Liability Company
Method of Formation
It is formed by an agreement of the owner-members of the company. Articles of organization are filed. Charter has to be given by the state.
It is treated as a legal entity.
Member-owners liability is limited to the amount of capital contributions or investments.
Can have perpetual existence, unless there is only one member (like a corporation).
Member interests are freely transferable.
Member-owners can fully participate in management, or they can designate managers to oversee the firm on their behalf.
LLC does not get taxed, and members are taxed personally based on the profits that get “passed through” the LLC.
Fees and Annual Reports
Organizational fee is required, as well as a possible business privilege fee.
Foreign Business Transactions
Generally no limitations.
Speak to an LLC Lawyer in Los Angeles
While an LLC can offer you and your business many powerful tools and advantages, getting it set up as an LLC can be a somewhat difficult process. That’s where we can help. We have helped many clients start up LLCs for their businesses as well as converting an already existing business into an LLC. We always look for ways to help our clients maximize their profits in the legal realm, and this is no exception. If you or a loved one wishes to open an LLC, or has any further questions, we invite you to give us a toll free call at 310-933-5171 to speak to one of our Los Angeles business lawyers today.
KAASS LAW is authorized to practice law in California. The above content is intended for California residents only. This content provides only general information which may or may not reflect current legal developments. KAASS LAW expressly disclaims all liability in respect to actions taken or not taken based on any of the contents of this website. The above content DOES NOT create an attorney-client relationship. KAASS LAW does not represent you unless you have expressly retained KAASS LAW in person at the KAASS LAW office.
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