A Bit About Limited Liability Companies

Do you already have, or are you starting, a limited liability company (LLC) in California, New York, or Delaware? Do you need an operating agreement or articles of organization? Do you understand the benefits, liabilities, and responsibilities of starting and operating an LLC?

Like a corporation, an LLC is a legal entity considered to be a "person" under New York law, California law, Delaware law, and the laws of every other U.S. jurisdiction. As a legal person, an LLC has rights and obligations. It can own property and enter into contracts; and it can sue or be sued by another LLC or a corporation, by human beings, by the government, and by other legal persons. An LLC is (and, with some important exceptions, is usually legally treated as) separate from its owners (members or unit holders). This distinction means that doing business under the form of a Limited Liability Company has many different advantages, and possibly some disadvantages, depending on your circumstances. A Limited Liability Company is a good choice of entity type for many businesses, though it may not be the best business entity type for all businesses. Each business has its unique circumstances, which may suggest one type of business entity over another. In either case, the goal is to choose the right entity type whose characteristics and laws best serve the needs of the owners. 

If you are looking to form a business entity for a new business or startup venture, or for an existing business in New York or in Los Angeles, Ventura County, or other part of California, I can help you identify the most advantageous business structure for you, or help you transition from a sole proprietorship or another structure into a corporation. I can also help you change the state of formation ("re-domicile") of a Limited Liability Company, corporation, or other business entity.

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What is a Limited Liability Company (LLC)?

A limited liability company is a business structure that combines features of a partnership and corporation. Like a corporation, the owner's personal liability in an LLC is usually limited to the extent of their initial investment or contribution. However, its tax situation is often (but not always!) the same as a partnership. 

LLCs can have an unlimited number of owners, called members. Member each own a percentage of the business that is often (but not always!) proportionate to their respective investments. 

The specific regulations around forming and running an LLC vary between states.

Differences Between an LLC and a Corporation

While both limit the personal liability of their members (in an LLC) and shareholders (in a corporation), there are some key differences between the two structures. 

Taxation Options

At the federal level (that is, as far as the IRS is concerned), corporations are separate tax entities, filing (and, depending on the nature of the corporation, paying) taxes at the corporate level. LLCs, on the other hand, can be "disregarded entities." That is to say, when an LLC is a disregarded entity, the IRS disregards its actual existence for tax purposes, unless the owners make an election to have the LLC treated differently. The owners of an LLC can elect for the LLC itself (and not the owners themselves) to pay federal tax. If the LLC does not, then the profits and losses are passed to owners, who then pay tax on profits attributed to them at the personal tax rate. And if losses of the LLC are imputed to the owners, then the owners can generally uses those losses to reduce their income tax they would otherwise have to pay from taxable income from other sources. But, note that the tax laws and regulations for LLC's can be complex and confusing, and the LLC (and often each of its members) should have the advice of a qualified tax accountant or other professional tax advisor.

Governance Flexibility

Just like the internal affairs of a corporation are governed in part by the corporation's charter, its bylaws and (sometimes) a shareholders agreement or other similar agreements), LLCs use an "Operating Agreement" to set out how it will be governed, including management structure, restrictions on buying or selling ownership interests, profit sharing, dissolution, and other important matters. LLC laws of New York, California, Delaware, and other states are quite flexible, and the Operating Agreement of an LLC can benefit from that flexibility, and be designed according to the members' preferences. 

Level of Administration

Corporations must comply with more rigid government rules and regulations that LLCs do not have to follow. These rules and regulations involve stricter reporting and administrative requirements. 

Advantages of an LLC in California, New York, and Delaware

There are many advantages that flow from forming a business as an LLC. Below are descriptions of a few of them.

  • LIMITED LIABILITY. One of the biggest advantages of an LLC is that, like a corporation, it limits the liability of owners to their investment in the business. Owners can't be held personally liable for a company's debts and their personal assets are protected in the event an LLC can't pay a creditor, goes bankrupt, or is subject to a lawsuit. 
  • TAXATION. LLCs can be taxed as a sole proprietorship, partnership, or corporation, depending on a number of factors. By default, an LLC is a pass-through entity. This means taxation is passed to the owners who pay taxes on the profits (or losses) via their personal tax return, avoiding double taxation. In some circumstances, an LLC can elect to be taxed as a corporation. This flexibility allows members to choose a taxation structure best suited to their situation. 
  • FLEXIBLE MANAGEMENT. When it comes to management, the members of an LLC can choose to either share management responsibilities or act like passive investors by nominating one or two managers to run the business (either members or non-members)
  • FLEXIBLE CAPITALIZATION. Since LLC's are creatures of contract under each State's statutes, the flexibility available to the founders for capitalization is broad. The "sky" of the owners' imagination is the limit to an LLC's types of ownership interests which it can issue to founders, investors, vendors, and others.   
  • FEWER FORMALITIES. It's typically easier to set up and run an LLC than a corporation. There is (sometimes) less paperwork involved and, unlike a corporation, an LLC isn't required to hold board or shareholder meetings or appoint officers and directors. 

Whether any one or another of the above advantages benefits your business depends on the business itself and what your goals are. That's why speaking to a business attorney with experience forming LLC's in California, New York or Delaware can be critical to the success of your company.

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Disadvantages of an LLC in California, New York, and Delaware

Some disadvantages exist with any given business structure. Here are a few that you should be aware of if you intend to form an LLC in California, New York, or Delaware.

  • SET-UP COSTS. Forming an LLC often involves filing fees. It can be more expensive to set up an LLC than other business structures, like a sole proprietorship or partnership. Many states also charge LLCs annual fees and taxes. 
  • FORCED DISSOLUTION. In some states, an LLC must be dissolved when a member leaves, dies, or goes bankrupt. In comparison, a corporation can exist in perpetuity. 
  • TRANSFERRING OWNERSHIP. It can be more difficult to transfer the ownership of an LLC compared to a corporation or some other business entity. 
  • ATTRACTING INVESTORS. External investors often prefer investing in a corporation rather than an LLC. This preference is because an LLC is often viewed as a more complicated structure in terms of taxation and managing outside investment. 

Do You Need a Business Lawyer for Forming an LLC in California, New York, or Delaware?

There is no legal requirement to hire an attorney when forming an LLC, just as there is no legal requirement to pay a medical doctor to diagnose that weird feeling that you never felt before. But, in either case, deep down we all know its a good idea to speak to an experienced, objective professional rather than trying to "DIY it."

An experienced business attorney can assist you with determining:  whether an LLC is the right business form for you; whether forming in California, New York, or Delaware makes more sense; what formation, organization, and investment structure best suits your business; and, how other formation, organization, capitalization and other matters should be analyzed and addressed. 

If your business is complex or involves especially risky transactions, a business lawyer can work proactively to avoid legal mistakes on your behalf. If a legal issue arises, they will walk you through the process, representing your interests throughout it. 

Considering these factors with a corporate lawyer will help identify if a corporation or an LLC is right for your business.


If you think you may need to form an LLC or a corporation or other business structure, do it properly. I would love the chance to get to know you and your business, for you to consider me a professional resource to help you form your business entity, structure your management and economic arrangements, and comply with applicable organization formalities, so that you can focus on growth and executing on your business strategies.  Click here to make an appointment now for a Free Consultation.Schedule time with me


This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read Legal Notices here.

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