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Limited Liability Company (LLC)

What is a Limited Liability Company/LLC?

A Limited Liability Company (LLC) is a business structure similar to, but significantly different in several ways from, a corporation. An LLC is a business entity that exists separately from its owners (known as Members), meaning, just like a human, it can own property and sign contracts.

What are the benefits of a Limited Liability Company/LLC?

An LLC combines the protection from liability that a corporation provides (known as "limited liability") with the simplicity of being taxed as an individual or partnership (known as "pass-through" taxation where the owners pay the LLC taxes on their personal tax returns).

How is an LLC different from a corporation?

An LLC differs from a corporation in many different respects but in general it has less operating formalities and less complicated taxation rules. By default an LLC does not need to issue shares, elect officers, etc. A corporation gets "double taxed" in that profits are taxed at the corporate tax rate and then taxed again on the owner's personal tax returns once paid out. Profits from the LLC are taxed once on the owners personal tax return. An LLC is a strong choice for new and simple businesses that could benefit from asset protection.

What sort of business name protections does an LLC offer?

An LLC does not provide the same business name protections as a trademark, however the Secretary of State will automatically disallow confusingly similar names from being filed with them. Additionally, it establishes your business name in prior usage searches for those doing trademark research.

What is the annual LLC tax and when am I required to pay it?

The annual LLC tax is a yearly payment to the state Franchise Tax Board of $800 (if your annual income exceeds $250,000, the minimum tax increases after the first year). This fee is due 90 days after the LLC's formation and by April 15th every year after.

What is an Operating Agreement and why do I need one?

An LLC Operating Agreement is a written arrangement made among the owners (or Members) that explains how the business will be organized. Creating an Operating Agreement is important to clearly identify each owner, establish each owner's percentage of ownership, decision and voting power, rights and responsibilities, determine share of profits or losses, as well as explain what will happen to the business if one or more of the owners leave. If a company does not have an Operating Agreement, it is governed by default rules set by the state in which the business resides which may not be in the business's best interest.

If I'm a Single Member LLC, do I really need all this verbiage regarding multiple Members?

It is arguably more important for a Single Member LLC to have verbiage and procedures for multi-Member scenarios, even if you don't plan on adding new Members. As a single Member, if you run your business more as a sole-proprietorship and less as an LLC (following your Operating Agreement, holding votes, etc.) then you run the risk of losing the liability protections awarded by the LLC. In other words, even if you are a Single Member LLC you should always follow the procedures outlined in your Operating Agreement and avoid cutting procedural corners when running your business. Plus, when your business takes off, you will already have procedures outlined on how to grow and avoid that particular headache.