If you are thinking of starting a business in California, it makes sense to protect yourself with a business entity. With over 100,000 lawyers in the state, it may be the smartest move you ever make.
Limited liability companies have been around forever, right? Nope. The first appeared less than 30 years ago in Wyoming. They were created to help small businesses.
California is a notoriously bad place to do business given the taxes, fees and regulations. The state is also slow to acknowledge new business developments. In fact, it didn’t start allowing LLCs until the early 1990s.
So, what exactly is a limited liability company? It is a business entity thought up in a politician’s mind. The goal was to ease the burden on small businesses, and it does just that.
Few small businesses can withstand being sued, particularly if your personal assets are at stake. The LLC was designed to prevent losing your personal assets by providing the same liability protection found with a corporation.
Taxes are the next thing any business should focus on. Corporations can be difficult because they are double taxed. A LLC, however, is taxed like a partnership. The finances pass through to your personal return.
If you can choose to have a limited liability company taxed like a partnership, why not just use a partnership? The problem is liability. The partnership provides no protection. The limited liability company does, which makes it superior.
It may sound like the LLC is perfect for any situation. It is not. There are a couple of occasions when it can be a bad choice for your business.
Many businesses are started with the idea of going public. If this is your goal, an LLC is a bad choice. Simply put, you cannot take it public. The LLC does not have shares, so there is nothing to trade!
Taxes are a killer from both a personal and business point of view. Certain LLCs can lose the benefit of being taxed as a partnership. A single owner LLC is taxed like a sole proprietor by the IRS, canceling out any tax benefits.
Another danger with the LLC is the lack of formality. This can be a good thing, but it can also lead to laziness and sloppiness by owners. You must practice good business administration to avoid this problem.
The best entity choice for your business is highly dependent upon what you will be doing. The LLC is often the best choice for many, particularly in California, but make sure to get professional advice on the issue.
Find out more about California incorporation. You can get a unique content version of this article.
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