California LLC Quotes in Today's Los Angeles Times:

LLCs provide key financial benefits:
The owners receive tax and liability advantages. Such registrations have risen, but the format is not for everyone.
Cyndia Zwahlen: Small Business Report
July 25, 2007

To be an LLC or not to be an LLC? That is the question for a growing number of small businesses.

Whether to adopt the relatively new limited liability company format or to set up under the more traditional form of a corporation, partnership or sole proprietorship is a key decision for a small-business owner.

"An LLC is an important option for small businesses," said Jonas M. Grant, a business attorney based in Burbank. Interest in the format is high, he said.

The benefits of an LLC seem almost too good to be true.

The owners, or members, have the personal liability protection that shareholders of a corporation do, with far less paperwork and fewer regulations.

That means — barring illegal, unethical or irresponsible activity — their personal assets are not on the line when it comes to covering the company's business debts or legal claims against it.

At the same time, the owners avoid the double taxation on profit to which shareholders in a regular corporation face.

Limited liability companies pass profits to the members, who pay taxes at their individual income rates, as in a legal partnership. In California, where this type of company has been legal since 1994, there are 409,619 limited liability companies, according to the secretary of state's office.

The number of companies registered under this format has jumped each year since 2000, when the state finally allowed limited liability companies to be set up by single-person businesses. More than 73,000 LLCs registered with the state last year, compared with about 31,000 in 2000, the secretary of state's office said.

That growth doesn't surprise LLC expert Anthony "Tony" Mancuso, a Berkeley attorney who wrote the new edition of "Nolo's Quick LLC: All You Need to Know About Limited Liability Companies" (Nolo, 2007). "It was obvious to me that LLCs would become the next big thing in business entities because of the combination of benefits," said Mancuso, who has written several books on limited liability companies and other corporate structures for Nolo, a self-help legal publishing house based in Berkeley.

The newest version of his "Quick LLC" book lays out the basic features of limited liability companies, explains important exceptions to owners' limited liability and compares the LLC with other business formats.

He also discusses converting an existing business to an LLC, as well as tax and management issues. And he devotes a chapter to the paperwork involved in setting up a limited liability company. There is also a sample operating agreement and a checklist to help you determine whether forming an LLC makes sense for your business.

Considerations include whether your type of business is one in which business debts and claims could threaten your personal assets. Another consideration is whether you have assets, such as equity in a house, that could be at risk without the protection of an LLC.

"Anyone a little bit nervous about the adequacy of their insurance coverage" could be a good candidate, Mancuso said.

Existing sole proprietorships or general partnerships and anyone thinking of forming an S corporation, an entity that generally pays no taxes, he writes, could benefit.

Those who aren't good candidates include existing regular corporations, also known as C corporations. And in California, some professionals such as lawyers and architects may not form an LLC.

If you want to raise money from venture capitalists or by selling stock, an LLC probably is not the business form you need.

Mancuso makes it clear that despite the potential benefits of an LLC, they have to be weighed against the cost, especially in California. Although it costs just $70 and takes a one-page form to set up a limited liability company in California, ongoing annual fees and taxes could cost more than 10 times that amount. There is a minimum annual tax of $800, payable to the state Franchise Tax Board.

And once gross receipts hit $250,000, additional annual fees kick in, which range from $900 to $11,790.

There have been several challenges to the constitutionality of the state's LLC fees, but the issue is still working its way through the courts.

Although Wyoming, in 1977, was the first state to authorize limited liability companies, it wasn't until 1997 when helpful new Internal Revenue Service rules kicked in that the format began to gather steam among business owners

Limited personal liability protection does not apply if you personally guarantee a business debt or bank loan for the company. Then your personal assets are on the line. That will probably happen more often when a company is young and has not yet established its credit history.

And as is the case with all other business entities, an owner can be held personally responsible for financial losses caused by their negligent or careless actions, Mancuso said.

Mancuso recommends three steps to safeguard the protection against personal liability offered by an LLC.

Act fairly and legally, including disclosing important facts or financial information to members or outsiders such as vendors.

Put enough money into the LLC to properly fund it. Otherwise, a court may not consider it a legitimate business and yank the personal liability protection.

Separate personal expenses from LLC expenses. Aside from making good business sense, that is another way to show that the company is legitimate, especially if you will be a single-member LLC.

The limited liability format isn't available or appropriate for some business entities. In addition to a number of professions, banks, insurance companies and other financial service firms are not usually candidates for a limited liability company.

Even if you qualify for an LLC, you may not need the protection. In his book, Mancuso gives an example of a freelance proofreader working from home as a business that may not need the extra protection from lawsuit claims and business debt.

And if you decide to end your California limited liability company, it must be formally dissolved. For more details, go to the California secretary of state website at http://www.sos.ca.gov/business/llc/llc_faq.htm or call its business programs division at (916) 657-5448.

Important tax information for California limited liability companies can be found in the Franchise Tax Board's Form 3556, available online at http://www.ftb.ca.gov . Just type "Form 3556" in the search box.

Armed with the facts, you can decide whether LLCs have real benefits or not.

"Sometimes I get a new client who tends to believe an LLC is manna from heaven," Grant said. Of course that's not always the case, although, he said, "it certainly has its place and should always be considered."

(C) 2007 Los Angeles Times

Online Incorporation Services Review Article

I recently published an article that reviews the pros and cons of online incorporation services and other non-attorney corporation and llc formation options:

http://ezinearticles.com/?Online-Incorporation-and-LLC-Formation-Services-Advantages-and-Disadvantages,-Pros-and-Cons&id=628630

I don't expect this to be too popular with either the online incorporation services, or with the general public, because the article doesn't say what people want to hear ('quick', 'easy', 'do it yourself', 'save money', 'no lawyers', etc.), but I see the results of not using an attorney to protect one's self and do things properly the first time on an almost daily basis.

Just today, for example, a potential client called me to discuss representation and after a short initial consultation, agreed that a legal mess she was currently in that was likely to cost her $100,000 in losses could have been greatly reduced or, more likely, avoided entirely, with $2,000 - 5,000 worth of legal planning.

Many of my comments and opinions on online incorporation services also apply to storefront legal assistance clinics, paralegal and document preparation services, and accountants. Clients who have used these services to incorporate a corporation or form an LLC before they began working with me often show me corporate books with missing or inappropriate documentation, odd organization, wrong entity used, and the like. An accountant using a form is not giving you state of the art, custom documents; an accountant attempting to modify or draft legal documents is engaged in the unauthorized practice of law (UAL), a misdemeanor in California.

See also:

Is Legal Zoom a Good Idea? Do the Documents Work? by fellow WealthCounsel estate planning attorney Alexis Martin Neely;

LegalZoom.com reviews; and

Online incorporation service review.

[This post updated August 2008.]

California Tax Burden Among Worst in Nation

According to an article published last year, California ranks among the worst of the states in terms of its tax burdens on businesses and individual residents. The article points to last year's election results in which California voters approved additional taxes, as adding to the state's already high tax burden:

California may be back on its way to becoming Taxifornia – and that's before voters give their verdicts on Propositions 86 (cigarette tax), 87 (oil tax), 88 (property tax) and 89 (corporation tax). California was rated as having the 45th-worst tax climate among the 50 states in 2007, down from 42nd in 2005, according to the Tax Foundation's State Business Tax Climate Index, released this week.

The index measures five tax rates: corporate, individual income, sales, unemployment and property. The best states are, in order, Wyoming, South Dakota, Alaska, Nevada and Florida. After California, the worst states are Vermont, New York, New Jersey, Ohio and, worst of the worst: Rhode Island.

Curtis S. Dubay, an economist at the foundation and co-author of the report, told us that California's drop in the listings was not major, down just three spots, and was due to slight improvements in other states more than any worsening in California, where tax rates pretty much held steady the past year, except for the passing of some local school bonds. "It's possible to drop in the rankings just by standing still," he said. "The states tightly clump up at the bottom of the rankings. So any small change could make a difference."

The bottom line is that California's ranking was low, and remains low. Most jolting for Californians should be the comparison with neighboring states. In the overall tax index, Nevada ranks fourth, Oregon, 10th; Washington state, 11th; Utah, 16th; and Arizona, 28th.

The study offers an example from 2005 of how businesses make decisions based on tax rates: When Intel decided "to build a multibillion-dollar chip-making facility in Arizona due to its favorable income tax system. California struggles to retain businesses within its borders because Nevada provides a low-tax alternative." The study concludes that "taxes matter to businesses, and those places with the most competitive tax systems will reap the benefits of tax-friendly tax climates."

Taxifornia, Here We Come, Orange County Register (California), October 26, 2006

Likewise, California-based Countrywide Financial's CEO told shareholders employees that don't need to be in California will increasingly be hired in or relocated to Arizona instead, as a result of the tax and regulatory environment in California, which he characterized as out of control.

For most California small businesses, however, it makes little sense to form a corporation or LLC out of state (e.g., in Nevada or Delaware), which in most instances ends up costing more in initial and ongoing legal and accounting expenses, and saving nothing in taxes. If the business' owners are willing to relocate, then indeed California is, as the article points out, due to its political climate, among the least attractive for businesses, and Nevada is certainly preferable. But for those Californians not willing to move out of state and take their business with them (as many have in recent years), California remains the logical choice for incorporating a California business in most instances.

California Employees Granted Three Years to Sue Employers for Compensation for Missed Breaks

The California Supreme Court today ruled that employees have up to three years to pursue claims that their employer failed to provide required breaks, not one as was previously assumed by many employers. The stakes are high, because California law provides that, upon filing a claim, employers must pay to an employee one hour of pay for each rest or meal break that was not provided to the employee in accordance with California employment law. The law, enacted in 2000, has spurred numerous class action law suits.

California employers should take this opportunity to have an employment attorney review their employee manual and employment practices to ensure compliance and to assist in avoiding many of the legal land mines that exist in this area for unwary employers. Those without an employee manual or a knowledge of California employment law are especially vulnerable and should take heed of this warning.

The case in question is Murphy v. Kenneth Cole Productions, Inc., 07 C.D.O.S. 3958. More details on the ruling can be found at Law.com

Los Angeles Business License Tax Errors

Some new or small businesses in the City of Los Angeles who filed their business tax renewal on time, and qualified for exemptions from tax, are receiving Notices from the Office of Finance indicating they owe tax, interest, and penalties. If you believe you have received such a notice in error, contact your business lawyer, accountant, or the City of Los Angeles Office of Finance directly for resolution:

http://www.lacity.org/finance/

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