Limited Liability Partnership
An LLP, or Limited Liability Partnership, is a form of ownership in which all the partners receive limited liability protection. However, an LLP is similar to a general partnership in that all the partners can take an active role in managing the day-to-day affairs of the business. The LLP form of ownership is limited in the State of California to persons licensed to practice in the fields of public accountancy, law, or architecture. In addition, per recently chaptered SB 284, engineers and land surveyors are also included in the professions that can be formed as an LLP until January 1, 2019.
In order to form in California, an LLP must first register with the California Secretary of State. An LLP formed in another state must register with the California Secretary of State prior to conducting business in the state.
- The LLP is a flexible form of business.
- It is designed primarily for specific professional services.
- The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.
- The items of income, deductions, credits, and shares of property, payroll, and sales flow through from the partnership to each partner’s California Schedule K-1.
- Each partner is responsible for paying taxes on their distributive share.
- The LLP allows each partner to actively participate in management affairs.
- The LLP provides limited liability protection to each partner.
- A LLP remains in effect based on partners agreeing to a termination date.
- LLPs do not pay income tax but they are subject to the annual tax of $800.
Limited Liability Company
An LLC, or Limited Liability Company, is a hybrid business entity that blends elements of partnership and corporate structures. The LLC’s main advantage over a partnership is that, like the owners (shareholders) of a civil law corporation, the liability of the owners (members) of an LLC for debts and obligations of the LLC is limited to their financial investment. However, like a general partnership, members of an LLC have the right to participate in management of the LLC, and profit or losses flow through to its members. Certain types of businesses that provide professional services requiring a state professional license, such as legal or medical may not form an LLC. For California income tax purposes, an LLC will be classified as a partnership if it has more than one owner and will be treated as a disregarded entity if it has only one member. However, an LLC is allowed to elect to be treated (taxed) as a corporation. To be taxed as a corporation, the LLC files an election on Federal Form 8832, Entity Classification Election, with the Internal Revenue Service. California conforms to the federal entity classification regulations commonly known as "check-the-box regulations" that allow an LLC to elect to be taxed as a corporation.
- An LLC is a hybrid business entity that can be treated as a partnership, but it has the limited liability protection under civil law.
- An LLC is formed by filing "articles of organization" with the California Secretary of State prior to conducting business. An out-of-state LLC that conducts business in California should register with the Secretary of State.
- Forming an LLC is simpler and faster than forming and maintaining a civil law corporation.
- Either before or after filing its articles of organization, the LLC members must enter into a verbal or written operating agreement. A formal, written agreement is advisable.
- Its members typically manage an LLC, unless the members agree to have a manager handle the LLC’s business affairs.
- An LLC may have one or more owners, and may have different classes of owners. In addition, an LLC may be owned by any combination of individuals or business entities.
- If the LLC has more than one owner, it will be treated as a partnership (subject to Subchapter K), unless it elected to be treated as a corporation. The items of income, deductions, and credits flow through from the LLC to each member’s California Schedule K-1, Members’ Share of Income, Deductions, Credits, etc., and distributive shares of property, payroll, and sales. Each member is responsible for paying taxes on their distributive share. If the LLC has a single member, it will be treated as a disregarded entity, and it will be treated as a sole proprietorship or a division of its owner, unless it elects to be taxable as a corporation.
- A husband and wife owning an LLC may elect to be treated as a partnership or a disregarded entity.
- If the LLC elected to be taxed as a corporation, it is subject to corporation tax law and filing requirements.
- In general, all the owners (members) are shielded from individual liability for debts and obligations of the LLC.
- LLCs do not issue stock and are not required to hold annual meetings or keep written minutes, which a corporation must do in order to preserve the liability shield for its owners.
- Either before or after filing its articles of organization, the LLC members must enter into a verbal or written operating agreement. A formal, written agreement is advisable. Its members typically manage an LLC, unless the members agree to have a manager handle the LLC’s business affairs.
- Generally, members of an LLC that are taxed as a partnership may agree to share the profits and losses in any manner in compliance with Subchapter K. Members of an LLC classified as a corporation receive profits and losses in the same manner as shareholders of a corporation legally organized as such.
- An LLC’s life is perpetual in nature. However, the members may agree to a date or event of termination.
- LLC do not pay income tax but they are subject to the $800 annual tax and a fee.