Limited Liability Company

Santa Barbara & Ventura, CA Limited Liability Company Attorney

When starting a new business, owners have several different legal structures from which they may choose. One of those is the limited liability company, or LLC. As with any other type of business, there are advantages and disadvantages to the LLC which the owner must carefully consider before making a decision.

Having the right law firm by your side will help as you decide which legal entity your new company should adopt. Find out why so many business owners in Santa Barbara and Ventura, CA trust the guided experience that the Law Offices of Brian L. Fox, APLC provides.

What is an LLC?

A limited liability company is in some ways similar to a corporation. Most individuals who are deciding whether to form their business as an LLC are also considering forming a corporation, so it is helpful to compare a few of the major differences between the two:

Taxation

How a business or its members are to be taxed is of prime importance when deciding between an LLC and a corporation. A corporation is considered a distinct legal entity, which means that the business itself files and pays taxes. On the other hand, an LLC is what’s known as a pass-through organization.

As such, the LLC can elect to not pay the federal tax and allow profits and losses to pass through the organization to its owners. The owners then pay taxes at their personal rates. Santa Barbara and Ventura LLCs must also pay an annual California tax of $800 plus a fee (the amount of which is based on a tiered schedule) for income of over $250,000.

Governance

The governance of a California corporation is rather complex. The shareholders elect members of a board of directors to run the company, although corporate officers that the board appoints are responsible for managing the corporation’s day-to-day operations. Formation and the general structure of the corporation are subject to the articles of incorporation, and corporate by-laws govern its operations.

The main governing body of an LLC is the operating agreement into which the members enter. These agreements dictate a number of different matters (see below) and are flexible enough to be tailored to the members’ unique wishes.

Administration

California does not require Santa Barbara and Ventura LLCs to have annual meetings, although in practice it’s a good idea for LLCs to have them anyway. Conversely, corporations must have annual shareholder meetings. Meetings are an example of the key difference in administration between the two entities: while corporations are subject to more rigid rules, LLCs are not as tightly regulated and have more freedom.

What Should Be Included in an LLC Operating Agreement?

The exact contents of your LLC’s operating agreement will depend upon the unique characteristics of your business. As a general matter, however, it should include the following:

Formation and ownership of the company: This section details how the LLC was formed, who its individual members (owners) are, and how ownership is split among them. If your LLC distinguishes between voting and non-voting members, include that here.
Financial contributions and distributions: LLC members are expected to make initial capital contributions to the formation of the business, and may be called upon later for additional ones. Specifying these details, along with how profits and losses are to be distributed, is critical.
Roles and responsibilities: Generally, LLCs are member-managed or run by someone who is appointed to be the manager. Regardless, it’s important to detail the responsibilities and authorities of the members and managers.
Member voting: Include a section about how and on what issues the voting members will vote, and how many votes are required for a matter to be approved. Common voting issues include whether to take out a loan or make a significant expense on behalf of the LLC.
Access to records: LLC members generally need access to financial records such as bank statements and other key documents. The operating agreement should explain the right to access and review these records.
Indemnification: This section protects members and managers of the LLC from personal liability for the actions they take on behalf of the business. The agreement should include terms about how the LLC will defend members and managers who act in good faith.
Membership changes: Your LLC must decide whether and in what manner to admit new members to the organization, along with what happens when a member leaves or is expelled from the LLC. Buyout provisions are also important to compensate a departing member for their interest in the company.
Dispute resolution: Disagreements among LLC members are inevitable, so the operating agreement should contain dispute resolution methods. These usually include mediation and arbitration, both of which can preclude the more expensive process of litigation.
Dissolution of the LLC: The time may come when it is desirable or necessary to dissolve the LLC, and the agreement can dictate how many votes are required to dissolve it and under what circumstances. The agreement should also detail wind-down procedures, how to liquidate assets and pay outstanding debts, and how to distribute remaining funds to members.

Advantages and Disadvantages of LLCs

LLCs are popular among Santa Barbara and Ventura companies, but they should carefully consider the pros and cons of this business structure before selecting it. Among the advantages and disadvantages are:

Advantages

Limited liability: As the name implies, a limited liability company offers the benefit of limiting owners’ liability to what they invest in the business. Because the owners’ personal assets are shielded, they cannot be held personally responsible for LLC debts, including court judgments and creditor claims against the business.
Taxation: The pass-through nature of taxation is another advantage of the LLC structure. In some cases, the LLC can elect to be taxed as a corporation. But the default is pass-through taxation, by which members report their profits and losses and pay taxes on their personal returns.
Flexible management: The way in which the LLC is managed is fairly flexible. Members can share management duties as they wish, or simply select one or two managers who can run the business.
Less formality: Compared to corporations, there is much less formality with the LLC. There is less paperwork, there is no requirement to appoint corporate officers and directors, and no requirement to hold annual meetings.

Disadvantages

Operating costs: The expense to set up and operate a California LLC can be significant, especially compared to partnerships and sole proprietorships. As mentioned above, Santa Barbara and Ventura LLCs pay an annual tax and fee.
Ownership transfer: It can be more difficult to transfer ownership of the LLC when compared to other business forms. Careful drafting of the LLC’s operating agreement is therefore essential to avoid or minimize this problem.
Potential difficulty gaining investors: Investors often see corporations as more stable and reliable investments compared to LLCs. This may make it difficult to raise investor funds for business expansion or other needs.
Easier to dissolve: Corporations can exist in perpetuity, but this is not necessarily the case with LLCs. If a member dies or otherwise leaves the business, it may be or have to be dissolved. The fact that it’s easier to terminate an LLC may make some investors wary.

Contact Our Santa Barbara & Ventura, CA Limited Liability Company Attorney

As you decide which type of business to form, our legal team is here to work with you each step of the way. From establishing to operating your LLC, and defending it in litigation and other matters, you have a trusted ally in the Law Offices of Brian L. Fox, APLC. Connect with our Ventura or Santa Barbara office to get started.