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LIMITED LIABILITY COMPANIES
What is a Limited Liability Company?
The LLC is not a partnership or a corporation. It is a distinct business entity that offers an alternative to partnerships and corporations by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation.
What is the Paperwork required to form an LLC?
Articles of organization must be prepared and filed with the state and filing fees, initial franchise taxes, and other initial fees must be paid. Using an attorney is not a legal requirement. You can prepare and file the articles of organization yourself; however, you need to be thoroughly versed in the laws of your state.
If your LLC is formed through Total Tax Solutions all you need to do is complete the form at the end of this section to start the LLC formation process. We will prepare and file your articles of organization and pay the minimum filing fees.
You can use our service to form your LLC and save money on attorney’s fees. However, if you are unsure of what entity would be most beneficial to your business, consult an attorney.
What Should I Name my LLC?
As with a corporate name, it is important that your name portray the image you want for your new company. Legally, the name you select must not be deceptively similar to any existing LLC in your state.
The name you select must show your business is a Limited Liability Company, so it must include the words "Limited Liability Company," or the abbreviation LLC.
What is The organizational structure of an LLC?
An LLC is owned by its members. They are analogous to a partners in a partnership or shareholders in a corporation, depending on the how the LLC is managed. A member will more closely resemble shareholders if the LLC utilizes a manager or managers because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in the decision making of the company.
A member’s ownership of an LLC is represented by their "interests," just as partners have "interest" in a partnership and shareholders have stock in a corporation.
Is there a Minimum Number of Members?
Although the IRS allows an LLC with only one member, the state of California requires LLCs to have at least two members. A member of an LLC may be an entity other than an individual such as another LLC, corporation, partnership, or trust.
How is the LLC Managed?
An LLC may be managed by its members (owners) or by selected managers.
If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the decision making process of the company. If the members choose, they may elect a manager or managers to act in a capacity similar to a corporation’s board of directors. These managers are in charge of the affairs of the corporation.
Member management is the normal default rule of state law. This means that if managers are not selected in the articles of organization the members will direct the affairs of the LLC.
How is my LLC Taxed?
An advantage of the LLC is its tax flexibility - the members of the LLC are allowed to select how the entity will be taxed.
Most LLCs select to be taxed as a partnership. This means that the LLC is treated as a pass-through entity, paying no separate entity level tax.
On the other hand, the LLC could elect to be taxed as a corporation by completing IRS Form 8832. If this election is made, the LLC would pay a separate entity level tax. This choice may be advantageous if the LLC owners want to retain profits in the business and would prefer to have these retained earnings taxed at the corporate income tax rate as opposed to the personal rate.
What are the Advantages of an LLC?
LLCs offer numerous advantages.
- Pass-Through Taxation:
- LLCs allow for pass-through taxation. This means that earnings of an LLC are taxed only once. The earnings of an LLC are treated like the earnings from a partnership, sole proprietorships and most S corporations.
- Limited Liability :
- The LLC owner’s liability is generally limited to the amount of money that the person has invested in the LLC. Thus, LLC members are offered the same limited liability protection as a corporation’s shareholders.
- Flexible Management Structure and Flexible Ownership:
- Like general partnerships, LLCs are generally free to establish any organizational structure agreed on by its members. Thus, profit interests may be separated from voting interests.
Are there any Disadvantages of an LLC?
The disadvantages of an LLC include:
- More paperwork than an ordinary partnership.
- If the LLC is not properly structured there is a possibility of losing pass-through taxation.
Should I form an LCC or Incorporate as an S Corporation?
While the S Corporation’s special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.
An LLC may offer several classes of membership interests while an S corporation may only have one class of stock.
Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S corporation is limited to no more than 75 shareholders and the shareholders cannot be a C corporation, another S corporation, trust, LLC, partnership or nonresident alien.
LLCs are allowed to have subsidiaries without restriction. S corporations are not allowed to own eighty percent or more of another corporation’s shares.
An LLC requires at least two members (owners). An S Corporation requires only one shareholder.
Both are subject to the Franchise Tax Board minimum tax of $800 per year.
LLCs are relatively new and it may be difficult to find a person experienced and knowledgeable in handling the paperwork, tax returns and accounting for the LLC.
Understanding the differences between an LLC and S Corporation, and knowing the direction you want your business to go in the future will help in deciding between the two types of entities.
How do I form an LLC?
After you decide to form an LLC, articles of organization must be filed with the state government and initial fees must be paid. If you choose Total Tax Solutions to form your LLC, we will complete these administrative tasks legally and affordably.
After your Articles are filed, your LLC should have an organizational meeting where an operating agreement is adopted, interest certificates are distributed and other preliminary matters are completed.
Additional organizational steps that may be necessary after the articles are filed include:
- Obtaining a Federal Tax Identification number;
- LLC bank account opened;
- Accounting records started (accounting books);
- If the LLC will be conducting business under a name other than the name shown on the Articles of Organization, a Fictitious Business Name Statement (also known as D.B.A.– or Doing Business As) may need to be filed.
For more info about LLC's, please see the California
FTB web site 
Total Tax Solutions can file all the necessary forms and set up the
accounting books to make the incorporating process smooth. Call for more information.
