Should You Form An LLC For Your California Business?
by Rich Chappo
If you are going to do business in California, you need to have a business entity to protect you from the 100,000 plus attorneys in the state. An limited liability company may be your best bet.
Of all places, Wyoming was the first state to come up with the idea of the limited liability company. Despite Wyoming instituting the entity in the late 1970s, many other states took a lot of time before following suit.
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.
An LLC is unique because it combines the best of other entities while also avoiding the worst. For many small businesses, this makes it an excellent choice of entity.
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.
No business owner wants to be double taxed as can often happen with a corporation. The LLC resolves this by borrowing the tax classification of a partnership, to wit, finances are passed through to the owners.
One might wonder why he or she should select an LLC over a partnership. The answer is liability. A partnership provides no protection to the owners, while an LLC does.
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.
The LLC can be problematic in another way. Because it requires little paperwork or administration, owners can fail to keep up with even the minimum requirements. This can be dangerous if anyone every challenges the validity of the entity.
All and all, the LLC is a very good choice for many smaller businesses. In a state like California, you get the liability protection of a corporation with the tax ease of a partnership.
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