Limited Liability Companies

An unincorporated entity in which none of the owners (called "members") are liable for the debts of the entity (similar to a corporation). Limited liability companies with more than one member are taxed as partnerships; those with only one member are taxed as proprietorships.

How Formed? Articles of organization (See the Appendix for a sample of the LLC-1) are signed by the organizer (who need not be a member or manager and often is an attorney or paralegal) and are filed with the Secretary of State (filing fee $70.00). Members enter into an operating agreement. Within 90 days following the filing of the articles of organization, the LLC must file a Statement of Information (Form LLC-12) with the Secretary of State. Names of managers of a manager-managed LLC, and the names of the members of a member-managed LLC, are made public record. (At this time, California has no legislation in place which would allow the state to penalize companies which do not file their statements in a timely manner.)

California law prohibits a limited liability company from rendering services for which a license, certification, or registration is required under the Business and Professions Code or the Chiropractic Act (unless the specific licensing body permits it - as with talent agencies). This is a very broad prohibition, including services rendered by chiropractors, dentists, medical doctors, osteopathic physicians and surgeons, podiatrists, licensed midwives, psychoanalysts, speech-language pathologists and audiologists, registered dispensing opticians, occupational therapists, dietitians, physical therapists, registered and vocational nurses, psychologists, optometrists, pharmacists, veterinarians, acupuncturists, marriage, family and child counselors, social workers, architects, landscape architects, interior designers, attorneys, professional engineers, locksmiths, contractors, home inspectors, barbers and cosmetologists, private investigators, funeral directors and embalmers, geologists and geophysicists, shorthand reporters, structural pest control operators, real estate brokers and appraisers, athlete agents, industrial hygienists, tax preparers, immigration consultants, and others.

The California legislature has just passed AB 831, which was signed into law by Governor Davis on September 27, 1999. This new law permits single member LLCs to be formed here.

Income Taxation: California requires the LLC to pay a minimum annual franchise tax of $800 (due by the 15^th day of the fourth month of the LLC's first taxable year), plus an additional statutory fee of up to $7,785 on gross receipts of $5,000,000 or more.  Single member LLCs are treated as proprietorships or a division of the parent company (unless an election is made on form 8832 under the "check the box" Regulation 301.7701-3); other LLC's are taxed as partnerships (again, unless an election is made on form 8832). (California law conforms to the federal; see, e.g., 18 Cal. Code Regs 23038(b)-3(b)(2).)

Self-Employment Taxes: An issue that often arises with members of LLCs concerns self-employment taxes. If a member of an LLC is treated as a limited partner, the member's share of the LLC's earnings will not be "net earnings from self-employment." Proposed Regulations 1.1402(a)-2(h) provide that an individual will be treated as a limited partner unless the individual:

(1) has personal liability for the debts of the partnership or LLC by reason of being a partner or member;

(2) has authority to contract on behalf of the partnership or LLC under the statute or law pursuant to which the partnership or LLC is organized; or,

(3) participates in the partnership's or LLC's trade or business for more than 500 hours during the taxable year.

If, however, substantially all of the activities of a partnership or LLC involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, or consulting, any individual who provides services as part of that trade or business will not be considered a limited partner for this purpose. (Unfortunately, as stated above, California law prohibits a limited liability company from rendering services for which a license, certification, or registration is required under the Business and Professions Code or the Chiropractic Act unless the specific licensing body permits it.)

"Family" Limited Liability Companies: [Same concerns here as with Family Limited Partnerships]