Beginning January 1st, 2012, the Contractors State License Board will begin processing applications for issuance of limited liability company contractor licenses. Until now, contractors could be sole proprietors, partnerships, or corporations, but not limited liability companies.
So what is a limited liability company? For those that may be considering a change in their entity status, below is a brief discussion of what a limited liability company is – including its advantages and disadvantages.
Limited liability companies (LLCs) have become a most popular choice for small to medium-sized businesses when compared to corporations or partnerships. Often described as the combination of a partnership and a corporation, the LLC combines a corporation’s liability protection with a partnership’s tax flexibility.
Advantages (and differences from corporations). The advantages of an LLC are several.
Less paperwork. Aside from filing the Articles of Organization, LLCs have very few paperwork requirements. Unlike corporations, LLCs are not required to keep meeting records regarding company decisions and business issues. Nor are annual meetings and minutes required.
Flexible management. An LLC can take whatever management structure the members deem fit to operate the business. Only one member is required. Unlike corporations, LLCs are not required to have a Board of Directors or Officers. LLCs instead use titles such as: member, manager, managing director, and chief executive officer.
Liability Protection. Unlike a partnership or a sole proprietorship, the personal assets of an LLC member are not at risk by operating as an LLC. Similar to a shareholder in a corporation, an LLC member is only liable for business loss judgments, and lawsuits up to their ownership interest in the company.
Taxation. LLCs are treated as a “pass-through” entity by the IRS. This allows members to report their share of profits or losses on their individual tax returns. The IRS does not assess taxes on the company itself. This avoids the “double taxation” that corporations experience.
Profit Distribution. Profits are distributed to members in any fashion deemed suitable. The ownership interest of an LLC member may not be an indicator of the amount of profits received or losses claimed.
Disadvantages. There are also disadvantages to being an LLC.
Entity Structure. All California LLCs are required under state law to have a Limited Liability Company Operating Agreement. Being there is no requirement for Officers and/or a Board of Directors; this agreement must address the rights and duties of the members, contributions, distributions of profits, etc. It is up to the members to prepare this.Annual Franchise Tax. Unlike corporations, at present LLCs are required to pay the annual minimum franchise tax of $800.00 during the first calendar year.
Annual Franchise Tax. Unlike corporations, at present LLCs are required to pay the annual minimum franchise tax of $800.00 during the first calendar year.
Double Taxation. In some instances, double taxation occurs – the company’s profits are taxed by the IRS at the business level.
Various Perhaps Confusing Titles. The principals of LLCs use many titles — member, manager, managing member, chief executive officer — which can be difficult for others to determine whom actually has the authority to act on bhelaf of the LLC. (As stated above, LLCs are not required to have a Board of Directors.)
Part Two. Stay tuned for next month’s article discussing further the comparison of LLCs to corporations, and whether it makes sense to switch to an LLC if you are already doing b usiness as a corporation.
Bryant H. Byrnes, Esq. practices construction law in the San Francisco Bay Area and is counsel to the SFBA NARI Board of Directors. Questions? Feel free to contact Bryant by email at firstname.lastname@example.org.