Why You Should Register Your New Business as an LLC in California

There are trade-offs associated with every business structure out there, and a limited liability company (LLC) is no different. Many first-time business owners might prefer to form a sole proprietorship or limited partnership because they are easy to register and have simpler tax filing requirements. It is well worthwhile, however, to consider using the LLC structure for your California business, even if you are taking your first plunge into entrepreneurship. 

Here are some of the reasons why forming an LLC might be the right choice for you: 

  1. An LLC offers pass-through taxation. With pass-through taxation, your LLC will not be taxed on income it collects as a business entity. You will only be taxed on a personal level when you file your annual tax return. Pass-through taxation is one of the attractive features of sole proprietorships, and it is also enjoyed by members of an LLC. 

  2. Using the LLC structure offers you protections from liabilities. Incurring certain debts and liabilities comes with the territory of being an entrepreneur. If your business doesn’t take off and you are unable to satisfy your creditors with income brought in from your company, you are generally shielded from paying debts from your personal assets. This also goes for lawsuits pursued against your business. 

  3. LLC members have more taxation options. Single-member LLCs, which have only one owner, may be taxed as a sole proprietorship, C-corporation, or S-corporation. LLCs with more than one member may choose between the latter two options and a partnership (but not a sole proprietorship). All of the structures previously mentioned, except for C-corporations, enjoy pass-through taxation. 

  4. There are no caps on LLC membership. While pass-through taxation also applies to S-corporations, there is a 100-shareholder limit for that structure. Unless LLCs choose to be taxed as an S-corportion, there is usually no cap on the number of members that may be involved with a particular LLC. 

Because of these benefits, the percentage of new businesses that register as an LLC is rising in California and across the country, but there are drawbacks too. For example, you will have additional tax forms to fill out, and you will need to pay an annual franchise tax in addition to self-employment tax. Depending on your financial situation and goals, a different entity formation may be better for you. To learn more about your entity formation options, call us today at 925-399-1529.

Written by Integrated General Counsel

Our focus includes handling a variety of corporate matters and also includes litigation in state and federal courts. Our current practice includes providing transactional services and representing a variety of small and medium-sized companies as their outsourced general counsel.