Basically an amalgam of a corporation and a partnership, a limited liability company can only exist by means of a state statute. Currently all 50 states and the District of Columbia have enacted some sort of Limited Liability Company Act. These acts provide the rules and regulations for the formation of an LLC, though they vary from state to state. In California, the Beverly-Killea Limited Liability Company Act provides the rules for creating an LLC.
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In 1977, the Wyoming legislature passed the first LLC act, but because of the ever-changing rulings by the Internal Revenue Service regarding classification of LLCs for federal tax purposes, several years passed before other states enacted similar laws. California took the plunge in 1996 with the enactment of the Beverly-Killea Limited Liability Company Act.
In a partnership, all owners are personally liable for all business debts and liabilities. As a separate legal enterprise owned by stockholders, a corporation shields its owners from business debt and liability, thus protecting the stockholders’ personal assets. While operating like a partnership, an LLC in California, as elsewhere, affords members the same liability protection of a corporation.
The profits of a C Corporation are essentially taxed twice. First the profits are taxed at the corporate level, then, when the profits are distributed to shareholders, they are taxed again as income to the recipient. While a partnership must submit an annual information return to the IRS, the business itself does not pay an income tax. Instead, income and losses pass through directly to the partners who report it on their personal income tax. Thus, partnership income is only taxed once. By default, the IRS will also treat an LLC as a “pass through” enterprise for federal tax purposes. In California, however, if the LLC is not taxed as a corporation, it must pay an Annual Franchise Tax to the California Franchise Tax Board.
Creating an LLC in California requires several filings to the Secretary of State. The LLC must first file Articles of Organization to begin its legal existence. The LLC is also required to file a Limited Liability Company Operating Agreement, which can be filed before, with or after the Articles of Organization. The Secretary of State also requires a Statement of Information, which includes contact information for the members and office locations. If appropriate, the company must also file a Fictitious Business Name Statement with the County Clerk. Although not all cities and counties require it, it is the company’s responsibility to research the necessity of any permits or licenses for the area in which it intends to do business. Also, if the LLC intends to sell products in California, a seller’s permit is required.
Potential Statutory Changes
On June 1, 2010, the State Bar of California presented a Legislative Proposal to the California Office of Governmental Affairs proposing the adoption of the Revised Uniform Limited Liability Company Act and the repeal of the Beverly-Killea Limited Liability Company Act. If adopted, LLCs can expect to see such modifications as changes in key definitions and the formation of operating agreements; changes in the procedure for document delivery and encouragement of arbitration in settling claims and disputes.