You may have come to the conclusion that an LLC is something to consider when forming your business entity. Perhaps though, you may still be wondering why it’s such a good idea? Forming an LLC has an array of benefits to help you protect your personal assets. In California this is no different. It might be even more important in California since the costs of working as a business entity are higher than most other states. There are many good reasons to form an LLC, as well as a couple of downsides.
What Are the Advantages of an LLC?
The LLC structure is growing faster than other business types due to the simplicity and flexibility this structure provides. In some states like Wyoming, you can even remain anonymous, protecting your personal information from being made public, while also protecting your personal assets. Here is a list of the top reasons to form an LLC:
Limited Personal Liability
Limited liability, or personal liability, protects an owner from being held liable for the financial debts of an LLC. This separation from an individual and an LLC is no doubt the best reason for an LLC to exist. This provides the same level of separation that a corporation provides, without the same level of complexity when it comes to formation or business management. In the event of a lawsuit, the LLC is considered separate from the individual who owns it.
When it comes to taxation, LLCs get the best of all worlds. They don’t have their own federal tax classification, but instead can adopt the tax status of different types of businesses, such as sole proprietorships, partnerships, S corporations, or C corporations. The IRS classifies LLCs automatically as either sole proprietorships or partnerships, depending on how many owners they have. This allows an LLC to take advantage of pass-through taxation. Where a C corporation is subject to double taxation, an LLC is only taxed once. Instead of paying as a business entity, the income and expenses pass directly to the owner(s).
LLCs are similar to S corporations when it comes to pass-through taxation, but there are restrictions a corporation has that an LLC does not. There is a limit to the number of owners for an S corp based on the number of shareholders, for example. An LLC can provide pass-through taxation with any number or type of owner it has. You can also convert an LLC into a different entity by filling out a Certificate of Conversion with the California Secretary of State. The filing cost is $150 if a corporation is involved, and it costs $70 for any other type.
California doesn’t offer the same anonymity that states like Wyoming provide, but there is still some amount of privacy protection, especially if you take the right precautions when forming your LLC. If you purchase a registered agent service, you can prevent your personal address from being made public.
LLCs in California can be formed easily compared to corporations. An LLC doesn’t have to hold the same annual corporate meetings, assign a board of directors or executive officers, create company bylaws, or record company minutes and resolutions. The owner of an LLC sets up their own management structure. There is also significantly less paperwork to deal with.
Forming an LLC provides a level of professional credibility. Having LLC in the title makes it easier for customers or partners to know you’re operating a legitimate government approved business.
What Are Some Disadvantages of an LLC?
Depending on the state, the cost of creating an LLC can vary. Depending on the size of your business, it might also be more cost effective to form a corporation instead. Here are some disadvantages to forming an LLC in California.
California’s Franchise Tax
The biggest disadvantage you should be aware of when forming an LLC in California is the annual tax that every business must pay in order to operate within the state. Even if you’re a foreign business making sales in California, you might have to pay this tax.
If you run a business that is larger in scale that generates bigger profits, you may have to pay more in taxes than a corporation would pay. If your business earns more than $250,000 in a single year, then you will owe an additional tax. You’ll have to fill out an estimated fee for LLCs (FTB 3536) to remit the estimated fee payment.
On the flip side, if your business is more of a hobby and you’re not intending to generate a lot of income, it might be better to become a sole proprietorship instead. This will allow you to avoid paying the infamous $800 franchise tax. This might be a better option if you’re running businesses that involve only friends and families as customers.
LLCs Are a Risk to Investors
It might be difficult to acquire business loans as an LLC. Lending institutions consider corporations less risky. Should you form an LLC and require business loans, it might be a better idea to form an S-corp instead.
Who Should Start an LLC?
If you’re looking for a simple and easy way to gain the tax benefits of a partnership and the personal liability protection that’s normally available to a corporation, then an LLC is the perfect starting place. You can gain all the protections with minimal complexity, and since an LLC is so flexible, you can always adjust to a different business model should the need arise.
There are some well known companies that still operate as LLCs today. Pepsi-Cola, Sony, Nike, eBay, IBM, and Apple, to name a few.
How Can a Business Lawyer Help?
It’s known that lawyers cost money, but there’s a reason for that. They come with the expertise to identify potential legal issues before they happen. Living in America comes with the ability to sue anyone for any reason, and that door swings both ways. Having a business lawyer will prepare you for such a scenario. They have more experience when it comes to spotting a legal problem ahead of time.
If you’re looking for advice while setting up your LLC, a lawyer will know what steps to take and why you need to take them. Having a legal expert available to answer questions will make the process easier to understand. You can contact our legal experts if you have any questions about what else we can provide today!