A limited liability company (LLC) is a statutory entity authorized by the laws of the State of California that generally shields its owners from liability arising from its business operations and the actions of the LLC’s agents and other owners. It is used primarily for operating businesses and for holding title to real estate. Various restrictions applicable to S corporations regarding number and type of shareholders; ability to “customize” control and management procedures and an “passive income” that the entity can have make LLCs increasingly the entity of choice for business operations.
LLCs are appropriate for those who want to own rental or commercial real properties as investments, or who want to operate a business. The advantage that a limited liability company has over corporations (and, in particular, over “S corporations”), is that an LLC can have a broader range of owners and can operate in a less formal fashion than corporations. For instance, they are not required to hold regular shareholder or manager meetings.
The other advantage of an LLC over an S corporations is that they have no restriction on the amount of “passive income” that can be earned by the LLC, whereas an S corporations cannot have more than 25 percent passive income or it will be disqualified. For most people who own real properties that are operated by a management company or do not require the owners significant amount of time to manage, any income generated from those properties will generally be considered passive income, so an S corporation is generally less suited for real property ownership than an LLC.
Why Is Being A Sole Proprietor Operating Under A Fictitious Business Name Not Sufficient For Some Businesses?
My sole proprietorship law practice is an office-based business that does not involve significant physical injury risks to the public. I have a single, office based employee and we sell advice, not a (potentially defective) product. I also carry sufficient malpractice and general liability insurance coverage and an “umbrella” policy to extend my protection error farther. Someone who owns a business that carries a higher degree of liability risk to the practice, or wants to attract investor capital will typically form a sheltering entity such as an LLC to operate the business. This process generally requires the formation of either a corporation or an LLC. With multiple owners, a corporation of LLC will have a more formal operating and management structure than a sole proprietorship. I often-times recommend that a client not incorporate his sole proprietorship business if the degree of tort risk it faces is low and he carries adequate liability insurance. They could avoid having to spend money to form and maintain the entity. He also does not have to file separate income tax returns or make minimum tax payments each year and lives with a simpler management structure.
What Are The Benefits Of Forming A Limited Liability Company?
The primary benefit is to shield the owner from liability for tort type (negligence) claims for personal injury or property damage. For example, if someone owns a rental property in his own name and not through an LLC and a tenant or visitor to that property is injured due to some defective condition, the owner will be personally liable for any damages that occur (over and above whatever insurance he carries on the property). In the same situation, if the property is owned by an LLC, the owner will not be liable for those damages individually. The entity itself will be liable, but not the owner.
It’s important to note that as a part of every business plan, whether or not the business or property is owned by a limited liability company, a corporation or directly in the owner’s name as a sole proprietorship, he still needs to carry adequate general liability insurance, which is always his first line of protection against claims.
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