Limited Liability Company
A limited liability company ("LLC") combines some of the benefits of a partnership and corporation, and can be structured to look very similar to either of those two business entities. An LLC like a corporation has a separate identity from its owners and therefore must generally register with the secretary of state in every state where it will conduct business. An LLC is formed by filing Articles of Organization. The owners of a LLC are called members. In a member-managed LLC, the owners are responsible for the business decisions of the company, and thus this model is structurally similar to a partnership. In a manager-managed LLC, the members are more akin to shareholders in a corporation. The management decisions are delegated to the LLC's managers who may but are not necessarily required to be members. Under either of the aforementioned internal structures, the members are not usually subject to personal liability for the debts of the business. Similarly to a corporation's shareholders, members in an LLC are only liable up to the amount of their investment, or capital contribution, in the LLC. Limited liability companies can also be taxed like partnerships - business profits and losses pass through to the individual members' personal income taxes.
Advantages of Limited Liability Companies
The use of a LLC has numerous advantages over other entities including: no requirement of an annual general meeting for shareholders; no loss of power to a board of directors; often much less administrative paperwork and recordkeeping; pass-through taxation, unless the LLC elects to be taxed as a corporation; limited liability, meaning that the owners of the LLC are protected from liability for acts and debts of the LLC; and membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest.
Disadvantages of Limited Liability Companies
In spite of the many advantages of an LLC business form, they do have some serious consequences that need to be considered. First, many states, including California, levy a franchise tax or capital values tax on LLCs. In California, the tax rate is based upon the LLC's gross revenue, not its net profit and for businesses with high gross receipts but a low profit this "gross receipts tax" can have serious consequences. In other states, this franchise or business privilege tax is the "fee" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors, or simply a flat fee, as in Delaware. Another disadvantage of an LLC is that it may be more difficult to raise capital, as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. Although there is no public requirement for an operating agreement, members who operate without one may run into problems. Some people, such as new business people, may not be familiar with the governance of LLCs. Unlike corporations, they are not required to have a board of directors or officers. The principals of LLCs use many different titles -- e.g., member, manager, managing member, chief executive officer, president, partner -- some of which are not correct. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf. Also, all income members receive is taxed at ordinary income rates and subject to FICA tax.
California Governance
In California, general provisions governing limited liability companies are found in California Corporations Code Section 17000 et seq. Limited liability companies are a relatively new form of business entity for the state. Formation and operation of such entities in California was authorized in 1994 through the Beverly-Killea Limited Liability Company Act. At this time professional limited liability companies are prohibited from forming or registering in California. The majority of limited liability company filings utilize forms prescribed by the Secretary of State, which were developed to simplify filing procedures. The prescribed forms provide for the statutory minimum requirements under the Beverly-Killea Act.
How We Serve Our Clients
With our experience working with entrepeneurs to establish new businesses we will guide you through the process of forming a new company, assisting you in choosing the appropriate legal structure and explaining the advantages of each for your particular enterprise. After the business is established, our attorneys will be at your disposal to answer general legal questions when they arise. Our clients also call on us to assist them during transitional periods, raising capital, locating venture partners, merging, selling, and closing a business.
