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The pros and cons of forming a California limited liability company

Reviewing the benefits and disadvantages of LLCs may help business owners decide if it is the right formation type for their new California companies.

One of the first steps for new business owners in California is choosing how they will structure their companies. Depending on factors, including their operational needs and goals, many decide to organize as limited liability companies, or LLCs. In order to help those just starting out determine if this is the right option for their business, it may help them to consider the pros and cons of LLCs.

Pro: Avoid double taxation

When businesses structure using other formation types, their income and losses may flow through the companies themselves. With LLCs, however, profits and deductions may be reported through the members', or owners', personal taxes. Therefore, rather than the company paying on its profits and then the members having to pay taxes again on their individual incomes, each member pays for their distributive share of the profits.

Con: Subject to self-employment tax

Unless they specify otherwise, the U.S. Internal Revenue Service generally treats LLCs as partnerships for tax purposes. Further, the agency considers those members who work for the company to be self-employed. Consequently, the responsibility for paying their Medicare and Social Security taxes falls to the members. Rather than paying an amount based on their individual compensation, as is the case with other formation types, the amount for the self-employment taxes members must pay is based on the company's total net earnings.

Pro: Limited liability

LLCs offer their owners certain protections from legal actions that other organizational structures do not. Civil law creates a separation between members and their companies, providing them with limited liability. Thus, for example, if a group is operating a logistics company as an LLC and a truck collision occurs involving one of their vehicles, then their personal assets may not be at risk in the event of a lawsuit. If they had established as a sole proprietorship or partnership, however, the owners might be forced to pay any resulting awards or settlements from their own personal finances, rather than their company's assets.

Con: Limited life

Some business organization types allow companies to live on long after the original owners have passed on. However, LLCs are tied to their members. This means that if one member dies or choose to leave the ownership group, the LLC may be dissolved. The remaining owners may choose to reform, though, and resume operations under an updated LLC.

Working with a lawyer

There are numerous complexities involved with the startup of a business in California. How people choose to structure their companies may affect every aspect of their business, from their operations and sharing of profits, to the life of the company and how they will handle disputes. Thus, it may benefit those who are working to get a new company off the ground to seek guidance from an attorney.

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