LLC - Limited Liability Company FAQ
What is an LLC?
A Limited Liability Company is a type of legal entity which affords its owners the same limited liability benefits of a corporation, with the simplicity and favorable taxation of a partnership. An LLC may have one or more owners, which are called members. As a separate legal entity, the LLC must have its own bank account, and all income and expenses must flow through this account. The LLC conducts all business in its name, and its members act as authorized agents on behalf of the company. Much the same as shareholders of a corporation are insulated from liabilities of the corporation, LLC members are protected from liabilities of the company.
Do I need an LLC?
The question which you have to ask yourself, is whether there is foreseeable liability in conducting the business. In other words, is it possible a substantial liability could arise? Even with insurance, there are many policy exclusions. Without an LLC, a substantial judgment could far exceed the policy limit leaving an unprotected business owner personally liable for the balance of the judgment.
Do I need an attorney to form an LLC?
No. However, you are taking great risk by not allowing your LLC to be prepared by an experienced legal professional. It is critical that the company be formed properly or it will be worthless if there is a lawsuit. And there have been some significant changes in the California LLC law as of January 1, 2014. Online software and document filing services owe no duty to their customers to make sure the proper documents are executed, or to ensure that the company is formed or operated correctly, or to notify you in the future of critical legal developments or changes in the law. If you are going to use a document filing service, you might as well set aside some time and do the work yourself. These service companies charge you to merely file a form, which you could mindlessly file yourself. It is ridiculous to utilize a filing service company to save a few hundred dollars. You definitely get what you pay for, and taking a shortcut now could cause a financially devastating surprise in the future. This firm has seen many instances of self-prepared and document service prepared LLCs, where the LLC would have been useless had a liability arisen.
What kind of tax returns will be required with an LLC?
With few exceptions, a multi-member LLC is taxed as a partnership and requires the annual filing of a Federal Form 1065 partnership return and a California Form 568 return. If the LLC is owned by only one member, or a husband and wife, or a living trust, then usually no separate federal return is required and only the state 568 form is necessary. The annual $800 state LLC/corporation tax is due with the tax return on April 15. In limited circumstances, it may be favorable to elect S-Corporation treatment for the LLC. Fortunately, LLCs are very flexible and may make a timely S-Corp election in any given tax year. In most instances this would be done in order to avoid the gross receipts tax which is otherwise imposed on LLCs earning over $250,000 in gross annual receipts. If the company has high gross receipts, but relatively low net profit, then this election may be favorable.
Will my property taxes change for real estate transferred to the LLC?
No. However, it is critical that the proper paperwork be prepared correctly. Failure to properly execute the correct paperwork and carefully utilize the narrow exemptions will result in your property being reassessed, which can be extremely difficult and expensive to reverse. This risk alone should discourage the use of an online service or paralegal.
If my property is currently held by my living trust, should it be transferred to an LLC?
A living trust can hold ownership interest of an LLC, so that the LLC and its assets will avoid probate. The LLC and living trust work together to simultaneously protect your assets from lawsuit liability and preserve your assets from probate, estate taxes, and court control of your assets. They can be created at the same time or independently of one another, and both can be modified or dissolved at any time by the owner.
Can I form an LLC for any type of business?
In California, an LLC can be formed to conduct nearly all types of business, except those requiring a professional license. For example, a real estate broker, medical doctor, and general contractor may not utilize an LLC according to California law, but may operate instead as a corporation. UPDATE: The Contractors State License Board (CSLB) has finally given approval for the licensing of LLCs, as well as Corporations, to act as general contractors. ANOTHER UPDATE: The State Legislature and California Department of Real Estate are in the process to soon allow licensing of LLCs, as well as Corporations, to act as licensed real estate brokers.
How does an LLC differ from a corporation?
The principal drawback of a typical C-corporation is the double taxation; first on the corporation's profits, and then on the shareholder owner's profits. For the larger corporation, there are advantages, which outweigh the double taxation. The owners of an S-Corporation, on the other hand, enjoy being taxed only once, like a partnership, while being afforded the same liability protections of the traditional corporate status. S-Corps are ideal for General Contractors, Real Estate Brokers and other licensed professions where an LLC may not be utilized. In many instances the LLC is preferable to both the C-Corp and the S-Corp. The LLC is particularly attractive for use in real estate investments. Unlike a C-Corporation, the LLC's profits are taxed only once. Many small business owners prefer the LLC to the S-corporation because their structuring is more flexible and once implemented, there are fewer formalities. LLCs do not require annual meetings or corporate minutes.
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