Should You Form An LLC For Your California Business?

California is a high risk, high reward state for businesses. The market is potentially very profitable, but the risk of being sued for something is also high. An LLC may be the answer to the risk factor.

To the surprise of many, the LLC has not been around for all that long. The first one was created in the late 1970s in Wyoming of all places.

California is a notoriously bad place to do business given the taxes, fees and regulations. The state is also slow to acknowledge new business developments. In fact, it didn’t start allowing LLCs until the early 1990s.

So, what exactly is a limited liability company? It is a business entity thought up in a politician’s mind. The goal was to ease the burden on small businesses, and it does just that.

Liability should be a big concern for any business owner. If you use an LLC entity, however, you are protected from personal liability for any business debts. At the same time, you do not have to deal with the paperwork of a corporation.

Taxes are the second bane of all small businesses. To ease the burden, the entity was designed to be taxed like partnership, which avoided the double taxation problem found with corporations.

If you can choose to have a limited liability company taxed like a partnership, why not just use a partnership? The problem is liability. The partnership provides no protection. The limited liability company does, which makes it superior.

At this point, you might think the LLC is the obvious choice if you are going to start a business. It often is, but there are a few exceptions. Here are two that come to mind.

One way to make huge money with a business is to go public like Microsoft. An LLC, however, cannot be taken public. The ownership of the entity is held as member interest, not shares.

Taxes are a killer from both a personal and business point of view. Certain LLCs can lose the benefit of being taxed as a partnership. A single owner LLC is taxed like a sole proprietor by the IRS, canceling out any tax benefits.

Whether a corporation or an LLC, you must run the entity as a business to gain the asset protection. Many LLCs, however, are run sloppily because the requirements are so informal the owners just get lazy. This can result in the LLC being pierced in a lawsuit, a disaster.

The best entity choice for your business is highly dependent upon what you will be doing. The LLC is often the best choice for many, particularly in California, but make sure to get professional advice on the issue.

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