Andy Gale from Incorporation Attorney answers a question from a client regarding a plan to set up a limited liability company for his business. You may have the same questions as this client. What is an LLC? What is an LLC used for, especially in California? Why should a business form an LLC? Andy answers these questions and more. Read through! 

Corporate Attorney Explains: What is an LLC? 

Andy, a corporate lawyer from Incorporation Attorney, received a call recently from a client who owns a trucking business. The client was seeking expert advice regarding forming an LLC in California. He was exploring his options and was wondering if he could structure his business into an LLC. The questions that this business owner asked are common questions that many entrepreneurs ask when planning to form a limited liability company in California.  

Andy explains that all business structures are business tools. An LLC, just like a corporation and a partnership, is a business tool. Andy shares that just like construction tools, a screwdriver and a hammer each have their own uses, drawbacks, and limitations. This means that some business entities may work for one owner but may not be the best structure for another. This is why it is important to consult with a corporate attorney when choosing the most appropriate entity to form.  

What are the Three Uses of an LLC? 

“Forming an LLC is one legal way of separating a business and its activities, including its liabilities, from the owner,” Andy expounds. In general, entrepreneurs form an LLC for these 3 main uses:  

1. Companies Form an LLC to Conduct Business on Behalf of their Owners 

This is the first and by far the most common, use of forming an LLC in California.  

Andy further explains by citing a scenario, “Let’s say that my client has a trucking company and he is the sole owner. He could operate the business as a sole proprietor. Another option would be to run the business through a limited liability company. But why would he consider forming an LLC? Well, as a business owner, you need to consider the risks of running the business, and one risk of the trucking business is vehicle accidents. Let’s assume that one of the trucks driven by his employee was involved in an accident. The driver was found at fault and the business was owned and operated as a sole proprietorship. In that situation, my client would be personally responsible for all of the losses suffered by the person hurt in the accident.  This is not a good result, especially if my client had personal assets to lose like his house, rental properties, bank accounts, and life savings.”  

In the example that Andy cited, if the business was operated through a limited liability company, it would be the company that would be responsible. The company will shoulder the losses suffered by the person hurt in the accident and not the business owner.  

One thing to be mindful of is the fact that if the business owns a lot of assets, those could be at risk. This leads us to the next common use of forming an LLC.  

2. What is an LLC Used for: To Hold the Assets of Operating Businesses to Protect from Third-Party Claims 

Andy says that an LLC is a legal tool to protect a business from third-party liability claims. He elaborates using the trucking business example. “The owner of the trucking company has been very successful,” Andy continues, “and has accumulated 12 trailers that cost $50,0000.00 each. If an accident happens to one truck, he can be at risk of losing all of his trailers, especially if the insurance policy is not sufficient to cover the losses.”

“What could he do?” Andy asks. He then explains, “With a little bit of preplanning, he could have formed a second limited liability company to hold all of his trailers. There would be a contractual lease agreement between the two companies where the trucking company would lease the use of the trailers from the trailer company. If any accident happens, the trucking company would be responsible. It has little or no assets. The trailer company would not be responsible, and the owner would have protected $500,000.00 in business assets.”

Andy strongly recommends that the owners of every business that owns valuable business assets should consider holding these assets in a separate holding-company – an LLC specifically designed for this purpose.

3. Businesses Form LLCs in California to Hold Personal and Family Assets 

The third common use of a limited liability company is to hold personal and family assets, both for asset protection and to provide for minority discounts and other potentially valuable estate planning discounts.  A common example of this is seen with a family that invests in rental real estate. They could title the property into their own name. But, if there was an issue at the property, then they have at risk the rental real estate and all of their other personal assets.

Andy advises that an option would be to place the rental property into a limited liability company which would then own the property. If a tenant brought suit, the claim would be against the limited liability company and not the owner of the property.

If the estate was large enough, and with some sophisticated estate planning, the owner could gift minority membership interests in the limited liability company to their children at a discounted value to the actual fair market value of the property. This would allow the owner to pass more property to their heirs reducing or eliminating estate taxes.

Learn More About What an LLC is and What is it Used for in California 

There is a range of uses for a limited liability company. If you are planning to form a business in California, find out if LLC is the perfect business structure for you.  Talk to us today. We’d be happy to help you. Call +1 (714) 634-4838!