When you decide on a legal structure for your new business, two factors you must consider are ease of operation and the degree of personal protection. For example, it’s relatively easy to set up and maintain a single proprietorship or small partnership, but these structures can leave your personal finances exposed to the liabilities of the company. At the opposite extreme, a corporate structure provides a great deal of protection for you and your finances, but it has many legal requirements that can make it complicated to manage.
Somewhere in between these two extremes is the limited liability company, or LLC. For decades, the LLC has been one of the most popular structures for new businesses, and for good reason. The process of forming an LLC is relatively simple and yet it offers a great deal of protection for business owners.
Compared to a sole proprietorship or simple partnership, an LLC also offers significant tax advantages. The IRS treats an LLC as a pass-through entity, meaning that, typically, the owners are not personally responsible for the tax debts of the company.
Adaptability
LLCs are also highly adaptable. They can be set up by one owner or a partnership, and the structure can change as the business grows.
While LLCs do have certain reporting requirements under California law, these are much less complicated than for a corporation. An LLC must register with the California Secretary of State and pay a tax of at least $800 every year.
But for the most part, LLC owners can decide on how to manage their business. In the case of single-member LLC, this means the single owner can decide on how to handle profits and other matters. For a multi-member LLC, the owners must decide through the terms of their partnership agreement.
Partnership agreements
California does not require a multi-member LLC to file a partnership agreement with the state, but it is wise for all LLCs with multiple owners to have one of these agreements.
Your LLC’s partnership agreement is essentially a contract between the parties. You can use it to manage the expectations of every partner, and to dictate everything from how profits are shared to how the partners must handle disputes among themselves. It can also dictate the terms if one partner leaves the company.
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While forming and running an LLC is much less complex than forming and running a corporation, it must be done carefully. Experienced professionals can help business owners to choose the right foundation so that they are protected and their businesses can grow.