The LLC in California, short for Limited Liability Company, has become a very popular legal structure for small business owners as well as larger operations. An LLC is an attractive alternative to other forms of business entities because it combines some of the legal characteristics of a California Corporation with the pass-through or flow-through tax treatment of a sole proprietorship or partnership. (Continued below…)
Like corporations, owners of an LLC in California enjoy “limited liability” protection – an advantage that is not available to sole proprietors. This means that when an LLC is properly formed and managed, creditors cannot go after the business owners’ personal assets when collecting on business debt. Creditors who have claims against the business may be able to satisfy the debt by attaching property owned by the business, but not property owned by the business owner or owners. Limited liability protection shields the owners from business debts and obligations.
Like partnerships or sole proprietors, LLC income and expenses flow through to its members / owners by default, and the members must pay self-employment tax on all LLC income. An LLC in California has the option, however, to be taxed as C-Corporations, in which case income would not flow through. LLCs also have the option to be taxed under Subchapter S of the Internal Revenue Code like an S-Corporation.
The management structure of an LLC can accomodate a variety of preferences. For example, the owners can choose to be managed collectively by all members or by one or more managers who do not necessarily need to be owners of the company. LLCs can also adopt a corporate-like management model with directors and officers if that structure is preferred.
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