Limited Liability Company
A limited liability company (LLC) is a non-corporate business organization with one or more owners (called Members) who usually don’t have personal liability for the debts and obligations of the LLC. Cal. Corp. Code sec. 17101(a). LLC’s are often referred to as a business with a corporate like veil from liability to the personal owners, but with a tax treatment more akin to a partnership.
The LLC is formed by the filing of the Articles of Organization with the Secretary of State nOffices and shortly thereafter the members will sign an Operating Agreement with the LLC and its members, which document is much akin to the By-laws of a corporation.
Suffice to say that these entities, properly structured give the flexibility of a partnership; including all of the tax benefits of a partnership. Further, they put a limitation on liability as relates to the limited partners. This protection is very similar to the protection of a corporate veil which one obtains by setting their business up inside of a corporation. Additional layers of insulation can be established within the limited partnership by actually taking some of the interest that might normally be taken as individual interest as corporate partnership, or limited partnership interests within the partnership itself.
One reason why many businesses prefer the LLC structure is that there are fewer restrictions on who or whom cannot be an owner of the shares/ membership interests in the entity. By way of example an alien i.e. non-resident foreigner cannot own shares in a Sub Chapter S Corporation, but, those same aliens (non Resident) can own share/ membership interests in an LLC. Another reason to utilize these pass through structures is that they tend to afford more flexibility in management than a corporation. Also, with reference to flexibility this structure tends to be more flexible for various adjustments and changes to allocations of profits and losses.
One Caveat to the persons utilizing LLC’s is that they are subject to a gross earnings tax which none of the corporations or other partnership entities will incur as part of their structure. Thus this gross earnings tax can add a large additional tax bill on top of the annual Franchise Tax fee. There is however a cap on this gross earnings tax to the effect that when your gross is $5.5 million or higher the taxation of $11,750 will not go any higher, even if your gross receipts we up to $10 million. There are caps put on the annual tax, which specifically limits the tax to no more than $11,750 per annum, which again is an amount on the progressive tax scale which would show up when you had gross income of $5 million or more. Many practitioners in the business law area are unaware of this added tax.