When setting up a business in California, one has many options regarding which business structure they want to go into. While some would consider sole proprietorship or even a corporation, many would opt for an LLC. An LLC, or a Limited Liability Company, is a legal entity that can be used to run a business and hold assets. There are several benefits to running an LLC in California compared to the other business structures.
Running an LLC in California offers several advantages that will greatly benefit business owners. The main benefits of forming an LLC in California for a business are personal liability protection and taxation. Personal assets will be safe as the financial burdens will not carry over to the members of the LLC. Furthermore, individuals can choose a certain tax status that appeals to them and not worry about double taxation. Aside from those benefits, forming an LLC has other benefits over other business structures such as ease of entry, increased credibility, a registered name, etc.
Benefits of Creating an LLC in California
Personal Liability Protection
One major benefit of an LLC is that it provides the members of an LLC personal liability protection. This means that the individuals under the LLC will not be personally liable for the company’s debts and financial obligations. This also protects the members when the company is sued.
This is in stark contrast with sole proprietorship where the government sees the individuals associated with the business to be the business itself.
Personal liability protection is often considered to be a good enough reason to consider LLCs in the first place. People who go into business without this type of protection stand to lose their personal assets such as houses, cars, bank accounts, and more.
Pass-Through Taxation
Corporations in California are subject to double taxation which means that income is taxed twice: once to the corporation at its corporate tax rate and then again to the owners of the corporation.
However, that is not the case for pass-through entities such as S-corporations, partnerships, sole proprietorship, and most LLCs. These entities undergo pass-through taxation which means that the profits and losses pass through them to the owners who will then pay taxes at their personal tax rates.
This is particularly helpful for small business owners who wish to streamline their operations.
Aside from the financial advantages, pass-through taxation can also benefit business owners through other logistical means such as not having to file tax returns. These entities might be required to submit information returns but at the end of the day, reporting obligations are far simpler.
Options for Federal Tax Purposes
Another major advantage of forming an LLC is that the members involved have options when it comes to federal tax.
Due to the flexibility of an LLC as a business structure, an LLC with a single owner (a single-membered LLC) can choose whether they want their LLC to be taxed as a sole proprietorship, an S corporation, or a C corporation.
On the other hand, LLCs with two or more owners (a multi-membered LLC) can be taxed as a partnership, an S corporation, or a C corporation.
It is important to note that the members of the LLC will only be able to enjoy pass-through taxation as long as they do not opt to have the LLC taxed as a C corporation.
Name Registration
Sole proprietorships and partnerships use the names of the owners as their business names unless they register a “doing business as” (DBA) name.
However, part of starting an LLC is name registration which means that once an individual has registered a unique name for their LLC, no other business in the state is able to use that chosen name as long as that LLC remains active.
Credibility
Credibility is an important factor for a successful business as trust is a fundamental basis in the relationship between a client and a business. Not only is credibility important in generating leads but credibility is also required to maintain and bring back clientele.
Registering a business as an LLC can add a weight of credibility to an individual’s business – at least compared to a sole proprietorship or a partnership. Including LLC in the business name adds a sense of formality that can help customers and clients trust the business more.
Ownership Transfer
Business structures that have laid out their specific assets are easier to deal with in the event of a transfer of ownership. Either by sale of the interest or upon death, an operating agreement can make transfers significantly easier – especially compared to a sole proprietorship or a partnership.
Ease of Entry
Individuals going into business can always opt to remain as sole proprietors, but they will be leaving themselves vulnerable to financial obligations that might befall on their business.
On the other hand, setting up a corporation is especially tedious and complicated as corporations would require an elected board of directors to oversee the company, corporate officers to execute day-to-day operations, and corporations are usually for businesses that want to go public via an IPO – an initial public offering on the stock market.
As a middle ground, many suggest that forming an LLC is an ideal option because you get the benefits of a registered business structure with a very low barrier of entry.
After a name has been successfully chosen, all an interested party has to do is to select a registered agent, file the Articles of Organization (FundsNet suggests using an Organizer), create an Operating Agreement, and get an Employer Identification Number (EIN). Along with the required documents, interested parties should also send the payment for the filing fees ($70 in California); All the necessary documents and fees should be sent to the Secretary of State.