When you’re starting a business, the decisions you make early in the process are extremely important because your choices now will have effects throughout the life of the company. You’ll have to decide how the business will be structured, and the type of entity you choose will have a bearing on a range of matters, including taxation, personal liability and division of profits.
With these issues in mind, let’s discuss the limited liability company (LLC). An LLC is not a corporation, but a major advantage of an LLC is that its members, like shareholders of a corporation, enjoy certain protections from personal liability. In most cases, members’ personal assets are protected in the event that the LLC is sued or falls into debt.
In terms of legal structure, an LLC is a hybrid. While offering limited liability, which a corporate shareholder would have, the structure of an LLC also provides operational and tax advantages characteristic of a partnership.
Specifically, the LLC itself is not taxed, and all profits and losses, including taxes, pass through the business to the members. Their personal tax returns then reflect the profits and losses. It should also be noted that the LLC structure is beneficial for many businesses with only one owner.
If your LLC has multiple members, then it is a good idea to create an operating agreement to establish each member’s rights and responsibilities. An operating agreement can also detail how the business should be organized and how finances should be structured.
At Shulman Bastian Friedman & Bui LLP, one of our areas of practice is new business formation. Our attorneys help clients see the pros and cons of specific business structures, and we invite you to explore our website to learn more about forming a new business entity in California.