LIMITED LIABILITY COMPANIES
A California limited liability company ("LLC") is neither a partnership nor a corporation.
Like a corporation, an LLC limits the financial exposure of its owners, but also offers pass through taxation similar to a partnership. An LLC requires only one member. LLCs must pay an annual state franchise tax fee of $800. The initial franchise tax is due by the 15th day of the fourth month after the company's formation, and annual franchise taxes must be prepaid by the 15th day of the fourth month of each tax year. Each year the LLC may also have to pay a second fee/tax to the State Franchise Tax Board. The tax/fee is based on the gross income of the LLC. The fee/tax is for LLCs grossing more than $250,000 a year. Corporations do not pay this tax.
An LLC is owned by its "members", the way partnerships are owned by their partners, and corporations are owned by their shareholders. A member will more closely resemble a shareholder if the LLC utilizes a manager or managers. If the members choose, they may elect a manager or managers to act in a capacity similar to a corporation's board of directors. These managers are in charge of the affairs of the corporation. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in the decision making of the company. In California, it is assumed, unless otherwise stated, that the members will control and manage the LLC.
The advantages of an LLC include limited liability, pass through taxation and flexible management structure (voting interests may be separated from profit interests).
The disadvantages of an LLC include greater state oversight, since the LLC must be registered with the California Secretary of State, and some confusion by those who do business with the LLC because LLCs are relatively new (this is especially true if the LLC is going to be doing business with individuals or companies overseas).
In comparing a Subchapter S corporation to an LLC, a Subchapter S corporation also eliminates double taxation. However, it is limited to one class of stock, and only to 75 shareholders. In addition, Subchapter S corporations cannot be owned by C corporations, other S corporations, many trusts, LLCs, partnerships or non-resident aliens. LLCs are allowed to have subsidiaries.
