By: Brad Nakase, Attorney
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Ever since she was a child, Caitlin has loved to draw. As a teenager, she began drawing her own tattoos, eager to preserve her artwork for a lifetime. Sadly, these pictures washed off in the shower. So, Caitlin went to school for art design before getting trained in tattooing. Now, ten years later, Caitlin is opening her own tattoo parlor, where she has hired the best artists in Los Angeles to produce studding artwork for clients. One of Caitlin’s friends, Jane, took business classes in undergrad. She suggests that Caitlin open her business as a limited liability company, or LLC. Jane explains that there are many advantages to starting an LLC. If Caitlin ever faces a lawsuit from a client, for example, let’s say over a botched tattoo, then Caitlin’s personal assets are protected. She will not lose her home, her car, or her personal savings in a judgement. Also, there are tax benefits to starting an LLC versus a sole proprietorship. Caitlin is interested in this recommendation, but she worries that she doesn’t know enough about the subject. Jane suggests that Caitlin contact an LLC lawyer who can more fully explain the benefits and risks of starting an LLC, and who can help her through the process.
A limited liability company, otherwise known as an LLC, is a legal business entity that is similar in form to a corporation. LLCs are popular business types because they offer the limited liability of a corporation combined with the flexibility of a partnership. They also offer the pass-through taxation of a S corporation. If a business owner is unsure of what form of business suits their business best, they should contact a California corporate lawyer for advice and assistance.
Limited liability is a huge benefit of forming an LLC. An owner, or member, of a limited liability company will not be personally responsible for company debts beyond the value of their investment. This means that if there is a lawsuit or the company incurs massive debt, the member’s personal assets are safe from judgement. Instead, any damages will be paid from the LLC’s assets. A shareholder in a corporation has the same benefit of limited liability.
Compared to running a corporation, there are fewer formalities required in operating an LLC. While it is true that LLC operating agreements often arrange for annual meetings, these meetings are not required by California law. This may be reassuring to new business owners, because it is common for growing companies to forget about formalities such as annual meetings. This kind of laxity would not be good for those running corporations, however, because not participating in corporate formalities can result in a company losing its corporate status. It would also mean losing liability protection for the owners. Luckily, LLCs do not have these risks. In California, LLCs can skip the annual meetings with no consequences. An LLC also has more freedoms than an S Corporation. An S Corporation faces strict requirements regarding types of stock, foreign ownership, and voting. Members of LLCs, on the other hand, can distribute income and voting rights however they please. The owners may also manage the company as member managers, like partnerships. This means that they would have a say in the regular operations of the company.
Another benefit of LLCs is pass-through taxation. This means that an LLC’s profits and losses are “passed through” to the members, or owners, who then report these results on their personal tax returns. C corporations face double taxation, which were profits are taxed both at the corporate level and again when shareholders receive their share of the profits. Pass-through taxation is far more preferable for a company.
LLCs do, however, have one tax disadvantage. LLCs in California must pay a gross receipts tax in addition to the personal taxation passed through to the owners. The gross receipts tax is an additional fee that is based on the business’ gross revenue, not profit. This means that a company with a small profit margin may wish to consider another business type than an LLC. Again, if in doubt or in need of advice, it is best to contact an experienced corporate attorney.
In order to form an LLC in California, a business owner will need to complete Articles of Organization, which is also known as Form LLC-1. This form must be filed with the office of the California Secretary of State. Under California law, an LLC must have a registered agent. This is an individual or corporation who agrees to accept service of process on the corporation’s behalf. Any legal documents, such as communication from the Secretary of State or lawsuits, will be sent first to the registered agent who will then pass it on to the company. A corporate lawyer in California can help file these documents correctly.
It is also advisable to create an Operating Agreement that discusses important issues related to the business. These topics may include management, distribution of profits and losses, capital contributions, death, dissolution, bankruptcy of a member, and the sale of membership interests to other parties. Again, if a business owner is concerned about correctly putting together an LLC’s Operating Agreement, he or she would be advised to contact an experienced corporate lawyer.
