LLCs As Business Entity Choices in California

By: Rich Chappo


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.

Few small businesses can withstand being sued, particularly if your personal assets are at stake. The LLC was designed to prevent losing your personal assets by providing the same liability protection found with a corporation.

Taxes are the next thing any business should focus on. Corporations can be difficult because they are double taxed. A LLC, however, is taxed like a partnership. The finances pass through to your personal return.

One might wonder why he or she should select an LLC over a partnership. The answer is liability. A partnership provides no protection to the owners, while an LLC does.

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.

Many businesses are started with the idea of going public. If this is your goal, an LLC is a bad choice. Simply put, you cannot take it public. The LLC does not have shares, so there is nothing to trade!

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.

Another danger with the LLC is the lack of formality. This can be a good thing, but it can also lead to laziness and sloppiness by owners. You must practice good business administration to avoid this problem.

If you are doing business in California, you need protection. There are over a hundred thousand attorneys in the state! A California LLC is often the best defense you have.

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