Just when I thought everything that could be said had been said about limited liability companies, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted and has resulted in a huge increase in meeting requests from business owners and real estate investors who have heard that forming an LLC will lower their tax rate. Therefore, I think it is a great time to do another set of informational blogs to help people understand what they are getting into when they form an LLC. Let’s start with some FAQs about California LLCs:
Which types of businesses can be an LLC?
The California Revised Uniform Limited Liability Act (Corporations Code Sections 17701.01-17713.13) restricts most (but not all) businesses licensed under the California Business & Professions Code from doing business as an LLC.
Attorneys, accountants, architects, engineers and land surveyors cannot form LLCs, but can form limited liability partnerships (LLPs). But what about other professional service providers?
Unfortunately, there is no list in the Business & Professions Code naming all types of professions that are licensed under that code. However, the B&P Code does specifically allow alarm companies, cemetery companies, private investigators and certain contractors to be LLCs. The Attorney General stated in a 2004 opinion that businesses requiring only a “nonprofessional occupational” license could operate as LLCs, but did not list any specific types of businesses either. And the Secretary of State doesn’t help – it simply allows all occupations licensed under the B&P Code to form LLCs.
So, what do you do if you aren’t sure whether you can be an LLC? The only safe bet is not to form an LLC if you require any licensing under the B&P Code and the relevant sections do not specifically allow it.
Why does this matter?
- After you form an LLC, if you later find out that you were not allowed to do so, there is no way to simply revoke the filing with the Secretary of State. You will need to dissolve and cancel the LLC or convert it to a corporation or limited partnership.
- The Franchise Tax Board will still require you to pay the annual tax and fee, even if the LLC is not legally formed.
- And most importantly, the LLC Members could be sued individually for liabilities of the LLC because they were not qualified to form an LLC, where personal liability may have been prevented by the formation of a corporation.
Knowing when an LLC is the right form of entity is something that will likely get missed more and more often with the rush to form LLCs to get tax breaks under the new Tax Act. This will be especially true for unsophisticated business owners trying to save costs by forming the LLC themselves or through an online service. Think before you file!
All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations. No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.