An Overview of California LLC and LLP Business Entity Types
Which entity type is appropriate for a business depends upon the type of business, the number of owners, the financial situation of the business and how the owners want to run the business.
November 03, 2012
Limited liability corporations and limited liability partnerships are useful entity types that can accomplish a variety of purposes for a business. Which entity type is appropriate for a business depends upon the type of business, the number of owners, the financial situation of the business and how the owners want to run the business. Only certain types of California businesses are allowed to form an LLP or LLC.Under California law, only professionals such as architects, attorneys or accountants can form an LLP. LLCs, on the other hand, cast a wider net and can involve many different types of entities, including solely-owned businesses, although some businesses such as banks and building contractors are not allowed to operate as an LLCs. Professionals that are eligible to form an LLP must form an LLP in lieu of forming an LLC.
LLPs and LLCs do have many similarities. Both have pass-through taxation by default, which means that the IRS does not tax the entity itself, as it does a C-corporation. Instead, the individual owners must file personal income taxes and self-employment taxes. In addition, both provide personal liability protection for the business owners, vastly reducing owners' risk of losing personal assets to the business. LLPs and LLCs are popular because of these benefits, and an LLC does not have the same administrative requirements of a C-corporation while still providing some of the benefits of a C-corp.
Protection from Liability
Sole proprietorships and general partnerships are the default entity for businesses. These entities leave the owners personally liable for the debts of the business, meaning personal checking accounts, the family home, and other personal assets would be fair game in a lawsuit or debt collection action. LLPs and LLCs provide personal protection from the liability and debts of the business.
LLPs are good for professionals because it isolates negligence claims. In an LLP, each limited partner is responsible for his or her own negligence. This means that other limited partners are not liable in a lawsuit for malpractice.
Not all actions protect personal liability in an LLC. In cases of fraud or misrepresentation, for example, or other misbehavior by members of an LLC, California courts will "pierce the corporate veil," meaning the members' personal assets are no longer protected.
Tax Savings
The IRS taxes an LLP like a general partnership, meaning an LLP receives "pass through" taxation. Partners in an LLP pay income taxes on their respective gains, but the partnership itself pays no taxes. A partner may also be responsible for self-employment tax.
An LLC also receives pass through taxation by default. However, LLC members can select how they wish to be taxed at the federal level. In California, an LLC may choose to be taxed as a sole proprietorship at both the federal and state level.
An Attorney Can Help
Choosing the entity type is only the beginning of business formation. Filing the articles of incorporation, creating bylaws and ensuring liability requires forethought and thoroughness when drafting. Those with questions on the appropriate entity type for a particular business should contact an experienced business formations attorney.
Article provided by A H Skola Law Offices
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