For those who are just starting a business, one of the primary concerns should be the organizational structure of the business. We have discussed in a previous post the many benefits of incorporating a business. For many small businesses in the Sacramento area, the Limited Liability Company (LLC) has become the organizational structure of choice.
In general, any Sacramento small business attorney will vouch that the LLC structure is favored by small business owners for its ease of formation, its flexibility, and its tax and liability features. Any drawbacks to the LLC structure are typically immaterial to the small business owner, as they apply only to specific business models and businesses of a certain size.
ADVANTAGES OF THE LLC
For one, the LLC can consist of as few as one member. As a result, a sole proprietor can very easily convert his or her business into an LLC without the need for a board of directors or shareholders. The LLC can also have an unlimited amount of members. In fact, its members do not have to be actual humans. Corporations and other LLCs can be “members” of an LLC.
The principal reason for forming an LLC is for the liability protection if offers its members. When a business owner forms an LLC, the LLC becomes a separate legal entity for the purposes of suing and being sued. This means that the LLC absorbs the liability of its members who are acting within the scope of the LLC’s business operations. As a result, if a member of an LLC were to commit a tort upon or breach a contract with another person or business entity, the LLC’s assets are the only assets that can be recovered in a court of law. The assets of the individual members are protected, absent extraordinary circumstances.
In many cases, the managing member of the LLC can choose how the LLC is to be taxed. In some jurisdictions, the LLC is treated like a sole proprietorship or a partnership, meaning that the managing member simply pays the LLC’s taxes on his or her individual tax return.
DISADVANTAGES OF THE LLC
In California, a small business attorney should inform his or her prospective clients about the limitations of forming an LLC. For example, in California, banks, insurance companies, architects, and accountants are among the business models that are forbidden from forming an LLC.
Additionally, the LLC is generally not viewed as a permanent fixture in the same way a corporation may be. As a result, the members of an LLC may have more difficulty obtaining a loan or securing investors than their incorporated counterparts.
Finally, the state filing and reporting requirements are considerably more lax for an LLC than for a corporation. This may seem like an advantage on its face, but this leniency can tend to cause problems if the LLC does not draft a formal operating agreement.
If you are unsure whether your Sacramento business would benefit from its formation as a limited liability company, consult a Sacramento business lawyer to discuss your options. You may be surprised to learn how it could help your business moving forward.
See Related Blog Posts
Fresno LLC Should Take Immediate Steps to Remove Managing Member
(Photo Courtesy of Dave Dugdale)