A limited liability company, or LLC, is a company structure that allows the owner to separate his personal finances from his business. The concept of a limited liability company is still somewhat new, and LLCs are not regulated by the federal recognition; each state defines the requirements, structure and formation of LLCs located or doing business in the state. California has particularly liberal requisites for business owners who want to establish their own LLC, and extends generous protections for existing LLCs throughout the state.
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Forming an LLC
Forming a limited liability company in California is a bit more involved than forming a proprietorship, but the process is relatively easy. The owners and any non-owning members of the LLC first enter into an operating agreement, which -- while not required -- should be in writing and, whenever possible, signed by all involved parties. The owners must then complete and file Form LLC–1, Article of Organization, with the California Secretary of State and pay a filing fee -- $70 as of November 2010 -- in addition to any applicable administrative fee.
Benefits and Protections
Owners of limited liability company in California enjoy complete division from the organization itself, and the members’ personal interests and assets are exempt from claims against the LLC or by the LLC against a member individually. Owners can choose how to share their gains and losses amongst themselves, or opt to draw salaries from the organization instead. LLCs can also choose their state taxation classification to take advantage of the tax breaks and credits that best fit the organizations' specific needs.
State and Federal Taxation
California taxes LLCs under one of three IRS classifications: partnerships, corporations or disregarded entities. Taxable income, taxable rate, annual flat tax and due dates vary depending on the classification the owners of the LLC elect, which owners can change from year to year as the LLC and its need change. LLCs must file federal taxes under the same classification as they do for state taxes, as the IRS does not recognize the concept of limited liability companies. The organization’s taxes are separate from the individual owners’, who still must file and pay both individual state and federal income tax returns each year.
Life and Termination
The life of a limited liability company in California is perpetual by nature, and does not dissolve after filing bankruptcy or upon the owner’s passing. The owner must explicitly terminate the organization during his lifetime or otherwise define a date or event on which the company will dissolve. If there are multiple LLC members, then all members must agree to the termination, or the date/event on which termination occurs, for the company to dissolve. Otherwise, so long as one member intends to continue operation, the company continues to exist.
Warning for Individually Owned Entities
The state of California does not automatically acknowledge limited liability companies formed by only one owner/member. Individually owned and operated LLCs are still recognized as sole proprietorships by the state, unless and until the owner elects to be taxed as a corporation by the IRS. To do this, the owner/member must file an election on IRS Form 8832, Entity Classification Election, with the IRS, and submit proof of same to the Secretary of State at the time of filing the Article of Organization. LLC owners who fail to do this can take this measure later on, but be aware that until you do so, the state will consider you a proprietorship and your personal assets are at stake.