Not only does a limited liability company offer limited liability but, it does not have to be formed using the formalities than are needed to create a corporation. Even though these business entities have become increasingly popular, they too may not provide limited liability to members under certain circumstances.
California Limited Liability Company
A California limited liability company offers protection from personal liability for business debts, just like a corporation. Additionally, like a Subchapter S corporation, a limited liability company also allows “pass-through” of any profits or losses to its members who likewise report this figure on their individual tax return.
Like shareholders of a corporation, members of this type of company are protected from personal liability for business debts and claims. This means that if the business itself can’t pay a creditor (landlord, vendor, supplier, etc.) the creditor cannot sue and attach a member’s house, car, or other personal assets. Exceptions to this rule are:
- Committing a tort or criminal act.
- Committing intentional acts that cause harm to the California limited liability company.
- Personally guaranteeing a loan or debt for the California limited liability company.
- Treating assets of the California limited liability company as their own personal property.
To create a California limited liability company you must file “articles of organization” with California’s Secretary of State. Additionally, you must create a written operating agreement which does not have to be filed with any state agency. The operating agreements contain the following information:
- The business to be conducted.
- Members’ rights and responsibilities.
- Each member’s percentage of interests in the California limited liability company.
- Which members have control.
Like a Subchapter S corporation, a California limited liability company is what the IRS calls a “pass-through entity” which means that the business income and losses pass-through the members who report this figure on their individual income tax returns. Each member must also make quarterly estimated tax payments to the IRS. While a California limited liability company does not themselves pay taxes, they must file Form 1065 with the IRS each year which is an accounting of each member’s share in the limited liability company or the limited liability partnership.
The company can be either member-managed or manager-managed. If all the owners participate equally in the management, it is a member-managed. If the operating agreement designates one or members (or one or more non-members) to manage it, it is a manager-management entity.
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