Experienced Pleasanton LLC lawyer James G. Schwartz can help you navigate the complexities of corporate formation. In California, forming a Limited Liability Company ("LLC") can be a good choice for businesses with multiple members that want to limit liability and enjoy decreased taxation. Like partnerships, California LLCs have significant flexibility in how they are organized and run, but they offer the greater protection of corporations in relation to lawsuits and debts. If you are starting a business in the East Bay, Mr. Schwartz can give you sound advice as to whether an LLC is an appropriate structure and guide you through the formation process.
An LLC can choose to be taxed as a "standard corporation" or choose the "pass through taxation" of a partnership depending on its goals, in order to keep the greatest share of net profits. You can create an additional level of protection from liability by making a corporation a member of an LLC.What Happens After You Choose to Form An LLC?
Once you choose to form an LLC, the next step will be to ask an attorney to draft a solid Operating Agreement. This is similar to the bylaws that are drafted to form a corporation, though it is usually simpler to run an LLC than a corporation. The Operating Agreement creates protection for the members by outlining the rights and benefits of membership, specifies a managing member, describes the method of distribution, and spells out all the rights, duties, and responsibilities necessary for the LLC's operation.
There is no limit to how many members you can have in a California LLC, nor restrictions on types of stock. Although the number of members is unlimited, you can also choose to create a single member LLC. For the most part, members are protected from liability should the entity be sued. The LLC's net profit is not considered income earned by the members and therefore will not be taxed as self-employment. In fact, this corporate form allows members to disproportionately split member profits and losses irrespective of their percentage of ownership in the business. Each member is able to pay him or herself by writing checks from the business.
The managing member typically acts as the company's figurehead and also manages the business. Any managing member's share of the LLC's net profit is considered earned income, and makes him or her eligible for fringe benefit treatment. As a result, he or she can deduct 100% of health insurance premiums paid up to his or her pro-rata share of the net profit.
The minimum tax for an LLC is $800. In addition, the total income from all sources reportable to California determines the annual LLC fee.
As the name suggests, an LLC has limited liability. A member who invests in this kind of entity can only lose the amount invested, and usually a creditor of the LLC cannot pursue him or her personally for his personal assets. It is critical to have a properly drafted Operating Agreement in part because an LLC loses it limited liability if a court determines that the business is actually just an "alter ego" of its members.Changes to LLC Law
In January 2014, California's Beverly-Killea Limited Liability Company Act was replaced by the California Revised Uniform Limited Liability Company Act ("RULLCA"). Two goals of the new law are to increase freedom of contract and to better coordinate California law with other states’ LLC laws.
RULLCA substantively changes the old law such that many existing limited liabilities formed in California must amend their Operating Agreements. Companies are not required by law to file new documents with the Secretary of State or revise them. However, there are numerous changes in the duties and rights of LLC members and managers, so it is a good idea to consult with an attorney to determine whether revision and filing new paperwork would be appropriate in order to keep with the company's goals.
For example, under the old law, an operating agreement offered indemnification of any person acting on behalf of the LLC, including officers, employees, and agents. Under the new law, all members must receive indemnification if they comply with the duties described under the new law. But an operating agreement can also specify that indemnification is not mandatory for officers, employees, or agents.Retain an Experienced East Bay LLC Lawyer
With over 30 years of experience handling business formations, Mr. Schwartz can help you determine whether the new rules make it appropriate to revise your Operating Agreement, or help you form an LLC for the first time. Contact experienced Pleasanton business law attorney James G. Schwartz at 925-463-1073 or via our online contact form. We serve clients in San Ramon, Fremont, Hayward, and throughout Contra Costa and Alameda Counties.