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What should you know about limited liability companies?

If you’re thinking about starting a business, you have probably heard about the limited liability company, or LLC. It is a popular type of business entity for several reasons. First, it protects your personal assets from being used to pay business losses or other liabilities. Second, it allows pass-through taxation to the owners (“members”) of the LLC.

An important thing to understand about business entities is that most require some degree of setup with the secretary of state. If you don’t choose a specific entity and set it up with the secretary of state, the default business entity is that of a sole proprietorship or general partnership, depending on how many people are involved.

If you operate as a sole proprietorship or general partnership, the business’s profits and losses are treated like your own, both for taxation and liability purposes. That means you are personally responsible for the business’s debts, including any liability you might accrue due to lawsuits.

Avoiding personal liability is one of the main reasons people set up business entities. Others include tax treatment, risk tolerance and management style.

LLCs are a lot like corporations in that they are considered separate entities from their owners for business purposes. This is why your personal liability is limited. The profits, losses and debts of an LLC belong to the LLC itself, not the members.

Unlike corporations, however, LLCs are not separate entities for tax purposes. This allows for pass-through taxation, which is relatively simple. The profits and losses of an LLC accrue to the members, and taxes are paid by the members.

Four main steps to forming an LLC in California

To form an LLC, you will first need to choose a business name that is not in use by another company and conforms to state law about company names. You can find out whether a proposed business name is available on the secretary of state’s name availability web page.

Next, you and any other members must set up articles of organization. This is an agreement as to the purpose of the LLC, the members and their rights.

Finally, you will need to file Articles of Organization (Form LLC-1) with the secretary of state and pay a $70 fee.

Finally, within 90 days of registration, you will need to file an initial Statement of Information and pay a fee of $20. You will need to refile this form every two years.

For more specific information about choosing the right business entity for your purposes or about setting one up, contact a lawyer who handles business organization.