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Creating an LLC: What You Need to Know

Portrait of a beautiful smiling female small business owner.

Los Angeles is the place for startup companies. Whether you have a great idea for an app or other technology, you have found a lucrative calling, or you are simply trying to formalize your side gig, it is important to dot all of your i’s and cross all of your t’s when forming your new business. Read on for a few pieces of general knowledge about LLCs, and reach out to a knowledgeable Pasadena business lawyer with additional questions or for help with your Southern California business enterprise.

What is an LLC?

An LLC is a limited liability company. An LLC is a legal entity distinct from the individual owners of the entity and is somewhat of a cross between a partnership and a corporation. LLCs can have one owner or multiple, and each owner or partner is known as a “member.” Members can be individuals, corporations, or other LLCs. LLCs allow individuals to shield themselves from individual liability for business-related debts and other obligations.

How to Form an LLC

To form an LLC, you must pick a name for your organization (which must include the words “limited liability company” or “LLC”) and choose a registered agent or agent for service of process. The agent is an individual or company that will accept legal papers on behalf of the LLC if it is sued.

You must file a formation document called the Articles of Organization. The document should include the LLC’s name and address, the name and address of its registered agent, and other basic information about the company, such as its purpose and how it will be managed. You will also need to file a Statement of Information with the Secretary of State as well as pay the minimum franchise tax. Depending on the size, nature, and location of the business, you may face additional tax and regulatory requirements.

Compensation and Taxation

The LLC can choose a particular tax designation, either as a partnership or as a corporation. That, in turn, will determine how the members of the LLC are compensated. Within corporate taxation, if the LLC reaches a certain net income threshold, it can further choose to be an S-corporation or a C-corporation.

If it is taxed as a partnership, members of the LLC cannot receive a salary for working for the business. Instead, they will designate a certain percentage of the profits to compensating partners. The remaining profits flow through the LLC and are taxed to the members based upon their respective ownership percentage. The same compensation setup applies for an S-Corporation: the profits of the LLC flow through the LLC as dividends and are taxed according to ownership.

If the LLC elects to be taxed as a C-Corporation, the profits do not automatically flow through the LLC to its members. Instead, the corporation itself pays taxes on the profits, and the members then vote on what to do with the remaining profits.

These are just a few of the tax, compensation, and governance considerations that members of an LLC will need to account for when forming and running the company. If you are establishing an LLC, consult with a seasoned California business attorney to understand your options, your rights, and your obligations.

Contact Pasadena Business Lawyer Andrew Ritholz

If you are starting a small business in California or are facing legal issues with your existing Los Angeles business, consult with an attorney who understands your rights and can protect your interests with focus and expertise. Contact Pasadena business lawyer Andrew Ritholz at 626-844-7102.

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