Starting a Business/Creating an LLC
The process of starting a business is extremely time‐consuming. A successful entrepreneur is aware that careful attention to legal issues is an essential component of success, even if they do not contribute directly to the bottom line.
Outline the initial steps of forming a CA business entity, specifically a Limited Liability Company (LLC). First, read the overview of Limited Liability Companies download, Second, watch the Video at the bottom of this page. Third, review the Fact Pattern. And, fourth, provide brief answers to all 6 questions below.
Lowell Litigant and Bernard Bedford have a great idea to open a shop selling re‐cycled kitty litter, in Huntington Beach, CA. Lowell and Bernard believe there is a demand for their product in that area of the State. They want to form a Limited Liability Company called, “Un‐Fresh Step, LLC.” Lowell and Bernard have already signed a lease for the shop, and have the equipment ready for production.
- With which CA government agency will Lowell and Bernard need to register their LLC?
- Is the LLC name (“Un‐Fresh Step, LLC”) available? *Hint: check here (Links to an external site.).
- What document will Lowell and Bernard file to form the LLC, and what is the filing fee?
- Can Lowell be the LLC’s Registered Agent?
- Once the LLC is formed, the owners should prepare an internal governing document. What is that called?
- Take a look at some of the brands and businesses you are most familiar with. Name 2 that do business as an LLC.
YouTube link: https://www.youtube.com/watch?v=072Yp0qkVyQ&t=25s
Reading: Limited Liability Entities
1. Learn about the development of limited liability entities. 2. Explore how limited liability entities are created. 3. Understand why limited liability entities are now heavily favored.
By now you should understand how easy yet dangerous it is to do business as a sole
proprietor, and why many business organizations are drawn to the corporation as a form
for doing business. As flexible as the corporation is, however, it is probably best suited
for larger businesses. Annual meeting requirements, the need for directors and officers,
and the unattractive taxation features make corporations unwieldy and expensive for
smaller businesses. A form of business organization that provides the ease and
simplicity of sole proprietorships, but the limited liability of corporations, would be much
better suited for a wide range of business operations.
A limited liability company (LLC) is a good solution to this problem. LLCs are a “hybrid”
form of business organization that offer the limited liability feature of corporations but
the tax benefits of partnerships. Owners of LLCs are called members. Just like a sole
proprietorship, it is possible to create an LLC with only one member. LLC members can
be real persons or they can be other LLCs, corporations, or partnerships. Compared to
limited partnerships, LLC members can participate in day-to-day management of the
business. Compared to S corporations, LLC members can be other corporations or
partnerships, are not restricted in number, and may be residents of other countries.
Taxation of LLCs is very flexible. Essentially, every tax year the LLC can choose how it
wishes to be taxed. It may want to be taxed as a corporation, for example, and pay
corporate income tax on net income. Or it may choose instead to have income “flow
through” the corporate form to the member-shareholders, who then pay personal
income tax just as in a partnership. Sophisticated tax planning becomes possible with
LLCs because tax treatment can vary by year.
LLCs are formed by filing the articles of organization with the state agency charged with
chartering business entities, typically the Secretary of State. Starting an LLC is often
easier than starting a corporation. In fact, you might be startled at how easy it is to start
an LLC; typical LLC statutes require only the name of the LLC and the contact
information for the LLC’s legal agent (in case someone decides to file a lawsuit against
the LLC). In most states, forming an LLC can be done by any competent business
professional without any legal assistance, for minimal time and cost. Unlike
corporations, there is no requirement for an LLC to issue stock certificates, maintain
annual filings, elect a board of directors, hold shareholder meetings, appoint officers, or
engage in any regular maintenance of the entity. Most states require LLCs to have the
letters “LLC” or words “Limited Liability Company” in the official business name. Of
course, LLCs can also file d.b.a. filings to assume another name.
Although the articles of organization are all that is necessary to start an LLC, it is
advisable for the LLC members to enter into a written LLC operating agreement. The
operating agreement typically sets forth how the business will be managed and
operated. It may also contain a buy/sell agreement just like a partnership agreement.
The operating agreement allows members to run their LLCs any way they wish to, but it
can also be a trap for the unwary. LLC law is relatively new compared to corporation
law, so the absence of an operating agreement can make it very difficult to resolve
disputes among members.
LLCs are not without disadvantages. Since they are a separate legal entity from their
members, members must take care to interact with LLCs at arm’s length, because the
risk of piercing the veil exists with LLCs as much as it does with corporations.
Fundraising for an LLC can be as difficult as it is for a sole proprietorship, especially in
the early stages of an LLC’s business operations. Most lenders require LLC members to
personally guarantee any loans the LLC may take out. Finally, LLCs are not the right
form for taking a company public and selling stock. Fortunately, it is not difficult to
convert an LLC into a corporation, so many start-up business begin as LLCs and
eventually convert into corporations prior to their initial public offering (IPO).
A related entity to the LLC is the limited liability partnership, or LLP. Be careful not to
confuse limited liability partnerships with limited partnerships. LLPs are just like LLCs
but are designed for professionals who do business as partners. They allow the
partnership to pass through income for tax purposes, but retain limited liability for all
partners. LLPs are especially popular with doctors, architects, accountants, and
lawyers. Most of the major accounting firms have now converted their corporate forms
The limited liability company (LLC) represents a new trend toward business
organization. It allows owners, called members, to have limited liability just like
corporations. Unlike corporations, however, LLCs can avoid double taxation by
choosing to be taxed like a partnership or sole proprietorship. Unless a business wishes
to become publicly traded on a stock exchange, the LLC is probably the most flexible,
most affordable, and most compatible form for doing business today. The limited liability
partnership (LLP) is similar to the LLC, except it is designed for professionals such as
accountants or lawyers who do business as partners.
Business and the Legal and Ethical Environment, Chapter 11.4. Authored by: Terence Lau and Lisa
Johnson. Located at:
License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlikehttp://2012books.lardbucket.org/books/business-and-the-legal-and-ethical-environment/index.htmlorg/licenses/by-nc-sa/4.0/”>https://creativecommons.org/licenses/by-nc-sa/4.0/