The Benefits of Registering an LLC in California

Registering an LLC in California can be a momentous occasion and the start of a lucrative business career that can help you take control of your financial future and career path. However, you don’t have to register an LLC in the state; you could be a solopreneur. This option is easier to start up, but there are benefits of registering an LLC in California which are discussed in this article.

What Does Domestic Limited Liability Company Mean?

There are two types of Limited Liability Company, domestic and foreign. A domestic limited liability company is formed and based in California. A foreign domestic limited liability company is an LLC registered in the state but can be based outside of the state.

A foreign LLC does not mean it is not in the USA. It can be in Texas, North Dakota, Canada, or the UK but still be a foreign LLC.

It is important to remember that the registered agent for the LLC must always be within the state. If you want to register an LLC in California, but are based outside the state, you should use a registered service.

Regardless of whether you are a domestic or foreign LLC, the same benefits and disadvantages apply.

The Advantages of an LLC in California

There are numerous benefits and reasons to register an LLC in California. These include some of these options.

Limited Personal Liability

One of the biggest advantages of being an LLC is that it allows the owner to separate their personal assets and business assets. And then the owner is protected from being held liable for the financial debts of the LLC.

Taxation

LLCs get the best of both worlds when it comes to taxation. They don’t have their own classification of federal tax but have an adaption of the tax status of different types of businesses. Because of the unique rule sets that are applied automatically by the IRS, they can use pass-through taxation.

Flexibility

LLCs are similar to S corporations for pass-through taxation, but there are restrictions for the S corporations that the LLC does not suffer from. There is a limit to the number of owners for an S corp, dictated by the number of shareholders. With an LLC, you can provide pass-through taxation with any number or type of owner. You can also convert an LLC into a different entity.

Privacy Protection

While there are some privacy protections in California, there isn’t the same level of anonymity that other states like Wyoming provide. One advantage is using a registered agent service which can protect your personal address from being made public.

Simplicity

LLCs are easily formed, especially when compared to other business entities such as corporations. An LLC doesn’t have to hold the same annual corporate meetings, assign a board of directors or executive officers, create company bylaws, or record company minutes or resolutions. The owner of an LLC can establish their own management structure. And you don’t need to deal with as much paperwork.

Improves Business Credibility

One disadvantage of being a solopreneur is that it makes it harder for the customers, partners or suppliers to know whether you’re operating as a legitimate government-approved business. Adding the LLC to the name makes your business appear more legitimate and opens up new opportunities. For example, you can open a business bank account, get better credit rates, and more.

What are the Disadvantages of an LLC in California

There are some disadvantages to registering an LLC in California. These include:

Franchise Tax

One of the biggest disadvantages of having an LLC in California is the annual tax every business must pay to operate in the state. Even those foreign businesses making sales in the state might have to pay this tax. For an LLC this is $800, regardless of whether you’ve made this number of sales in the state during the tax season.

Large Profits

While there are some taxation benefits, there is a tipping point where a corporation would be better. For those LLC businesses that earn a significant amount (more than $250,000) in a single year, the taxation system means that the business has to pay higher levels of tax.

Small Profits

Those with small profits, like those who have a side hustle or a hobby business and don’t want to generate a large amount of income, might prefer becoming a sole proprietorship to avoid some of the infamous taxes.

Investors See LLCs as Risks

Investors see LLCs as more risky than corporations, though they are less risky than sole proprietorships. So, if you’re thinking about trying to bring on investors, becoming a corporation might be better for you.

Final Word: The Benefits of Registering an LLC in California

There are numerous benefits of registering an LLC in California, but there are also some drawbacks. Considering these and weighing the best options for your business can be an important decision to determine how your business is run.