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If you are thinking of starting a business in California, it makes sense to protect yourself with a business entity. With over 100,000 lawyers in the state, it may be the smartest move you ever make. Of all places, Wyoming was the first state to come up with the idea of the limited liability company. Despite Wyoming instituting the entity in the late 1970s, many other states took a lot of time before following suit. California is not known as a business friendly state. This proved to be true with the limited liability company as well. It took the state nearly 15 years before it started allowing them after they first appeared in other states. So, what exactly is a limited liability company? It is a business entity thought up in a politician’s mind. The goal was to ease the burden on small businesses, and it does just that. No business owner wants to be exposed to losing personal assets if their business is sued. A limited liability company avoids this problem by protecting the business owner from personal liability for business debts. Taxes are the second bane of all small businesses. To ease the burden, the entity was designed to be taxed like partnership, which avoided the double taxation problem found with corporations. One might wonder why he or she should select an LLC over a partnership. The answer is liability. A partnership provides no protection to the owners, while an LLC does. All is not perfect with an LLC however. It may sound like it, but there are a couple of situations that can be problematic. The great American business dream is to go public like Google and make billions. Well, that is not going to happen with an LLC. It has no shares, so you can’t go public! You need to be a corp, instead. Taxes are a killer from both a personal and business point of view. Certain LLCs can lose the benefit of being taxed as a partnership. A single owner LLC is taxed like a sole proprietor by the IRS, canceling out any tax benefits. The LLC can be problematic in another way. Because it requires little paperwork or administration, owners can fail to keep up with even the minimum requirements. This can be dangerous if anyone every challenges the validity of the entity. If you are doing business in California, you need protection. There are over a hundred thousand attorneys in the state! A California LLC is often the best defense you have.
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