While the needs of each business are unique, where the entity will be owned by a few individuals who do not have a professional license, as required by the California Business and Professions Code, an LLC is often a very good choice. Like a corporation, an LLC provides protection from liability to the members of the organization in most situations. If a creditor obtains a judgment against a member, the amount the judgment creditor may collect from the LLC is limited to any distributions which are made to the member debtor. Moreover, the judgment creditor cannot compel a distribution. The member’s interest in the LLC typically remains intact, whether there is a judgment against them or not.
In addition, the administrative requirements to form an LLC are significantly less cumbersome than for a corporation. For example, an LLC is not required to appoint a board of directors, have shareholders, or maintain corporate minutes. This ease of administration typically makes it less expensive and time-consuming to operate an LLC compared to a corporation. In addition, the members are not required to remain passive with regard to the operation of the business as is required of shareholders. Instead, all members of an LLC are authorized to act on behalf of the organization, unless the members agree otherwise.
The key document in forming an LLC is the operating agreement, which sets out the members’ rights and obligations to the organization, determines the percentages of ownership, how profits and losses will be divided, what will happen if a member leaves the LLC, and generally includes the terms which the members have agreed to in forming the LLC. The operating agreement can be amended or modified by agreement of the members and typically dictates the members’ rights in the event of a dispute, to the extent permitted by law.
An LLC can also provide tax advantages over a corporation. Unlike larger corporations and partnerships, the members of an LLC can choose the tax status which benefits them the most. For example, if a multi-member LLC does not make an election, the profits will typically be taxed as a partnership. Similarly, a single member owner would normally be taxed as a sole proprietor if no election is made, avoiding the potential for double taxation; or the members could elect to be taxed as a corporation.
Ultimately, an LLC is the most flexible form of ownership for many small businesses, while still providing the owners with protection from liability relating to the operation of the business. If you remain undecided about whether you wish to form an LLC or have questions about your particular situation, the business attorneys at Gehres Law Library would be happy to assist you. Our attorneys provide many legal services on a flat fee basis, including LLC formations, so there are no surprises. Feel free to browse our Formation Fee Packages or contact us anytime.