Paramount benefits include protection from liability provided by the LLC.
Formation & Operation of an LLC in California - continued
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An LLC is dissolved in California by the consent of all the members unless all of the members have previously agreed in their operating agreement that such consent is not necessary, at the time of a member's withdrawal, removal, bankruptcy, death, or, if the member is a corporation or other legal entity, upon termination of the member's legal existence unless otherwise provided in the operating agreement. Absent other agreements among the members, if a limited liability company is dissolved, its business must be wound up and liquidated.
In order to prevent an unwanted liquidation of the LLC following its dissolution, members may continue the business pursuant to a right in the operating agreement or, if none is provided, then by agreement or consent of all the remaining members. Continuity may be terminated if it fails to amend its articles as required by law.
If the LLC's business is not continued following dissolution, the proceeds of liquidation must first be used to pay existing limited liability company obligations other than liabilities for distributions to existing or former members. If the proceeds of liquidation exceed the limited liability company's obligations, the remaining proceeds are distributed in whatever manner the members' operating agreement provides. In the absence of a provision in the operating agreement for distribution of liquidation proceeds, the remaining proceeds must be distributed, first, to satisfy unpaid obligations to members who withdrew from the limited liability company prior to dissolution; second, to existing members until they have received a return of their contributions; and, third, to the members in equal shares.
The income tax treatment of a limited liability company and its members is generally the same under U.S. and California tax codes as the treatment of limited partnerships. An LLC is not required to pay income tax on its net income, but simply reports each member's share of limited liability income or loss to be included in the member's individual income tax return. Like a limited partnership, an LLC is required to pay a withholding tax on behalf of a foreign member characterized as a nonresident alien for federal income tax purposes.
Similar to limited partnerships, a limited liability company may elect to be taxed as a corporation. In such case, the LLC and its members are treated in the same manner as a corporation and corporate shareholders.
A California limited liability company must file annual federal and state informational tax returns that reflect the limited liability company's income or loss for the year and each member's share of the limited liability company's taxable income or loss. The LLC must maintain copies of a current list of the names and addresses of its members, the original articles of organization, and all written operating agreements and amendments. An LLC must also maintain correct and complete financial records, which may be inspected by any member.
The principal benefit available with use of a California limited liability company is the protection against the personal liability of the members. A member's risk associated with the LLC is generally confined to the amount contributed or required to be contributed to the company. Other benefits arising from an LLC include the significant freedom of the members to allocate the sharing of profits, losses, and distributions and the single level of taxation.
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