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What you Should Know about California LLC
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LLC or Limited Liability Company has turned itself into a popular monster nowadays. Taking history into consideration, the conventional sole-proprietorship, partnership, and corporate structure existed long before LLC was created. The state of Wyoming first initiated the creation of LLC in 1977. But what makes it popular to most entrepreneurs and other business figures?
After the IRS declared the pass-through-entity classification of LLCs for tax purposes, all other states passed legislation allowing the formation of LLC in their territory. And the state of California is one of them.
LLC in California: An Overview
One of the reasons why the state government of California allowed the formation of LLC within their territory is to provide local entrepreneurs and investors in complying with their tax and business objectives. Just like LLC in other states, California LLC has combined the best features of a limited partnership and corporation while getting away with its undesirable characteristics. All LLC owners are subjected to personal limited liability in case LLC runs into debt just like a shareholder in the corporation. In other words, the owners will not lose more than what they have invested in the LLC.
Furthermore, LLC is not subject to double taxation, or the imposition of tax on both the income of the business and the profits of the individual shareholders plus their dividends. LLC profits are not subjected to income tax liability, thus it maximizes the LLC’s income. In addition, owners are given considerable freedom under California law with regards to the arrangement of rights and obligations pertaining to financial matters.
The process of forming an LLC in California starts by filing the articles of organization with the California Secretary of State through its Corporate Division Office. Conducting business prior to filing articles of organization will yield great risk of having LLC considered to be a general partnership with liability to all members for all obligations.
The articles of organization must reveal basic information about the proposed LLC for the purpose of public inspection. It must include the following items:
• The name of the California LLC;
• The name and address of a registered agent that will act on legal matters on behalf of the LLC (it may be a person, a California-based LLC or Corporation, or a foreign LLC or corporation duly authorized by the state government to conduct business within California); and
• A written declaration stating the agreement between owners of the LLC with regards to its management and their individual interests.
California law allows LLC members to decide among themselves how they will contribute their personal assets, money, property, or services during the formation of the LLC or at any time thereafter. A California LLC is allowed to borrow capital from its owners or from third parties. In case of third party creditors, they are looking more on the owner’s future capital contribution commitment as a guarantee that the debt will be repaid. LLC owners will be asked to sign promissory notes payable to the LLC. It will serve as a collateral to the creditor to secure the loan.
California law also allows LLC to distribute management rights and obligations among its owners or to give it to the LLC managers elected or designated by the owners. It also allows non-managing LLC owners to participate and vote on certain management matters like the approval of debt consolidation for the interest of the LLC.
A California LLC is not taxed according to its net income, but rather on the owner’s individual share of limited liability income or loss which needs to be declared on the owner’s individual income tax return. In case of a foreign LLC owner-member, California law requires an LLC with foreign owners to pay withholding tax for federal income tax purposes.
Forming an LLC in California means one thing: security and freedom in conducting business within the state’s territory.
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