Limited liability companies have become one of the most desirable forms of doing business. An LLC is a hybrid between a partnership and a corporation in that it combines the "pass-through" treatment of a partnership with the limited liability accorded to corporate shareholders.
The LLC concept originally came to America from Germany. Wyoming became the first American state in 1977 to enact a true LLC act modeled after the German model. The Wyoming LLC Act permitted the formation of LLCs organized for any lawful purpose except the business of banking and insurance. Many other states quickly followed Wyoming's lead. There were a variety of very good reasons for the popularity of this business entity, including:
California taxes all LLCs doing business in California an annual $800 minimum tax, as well as according to an additional fee structure. This fee is $900 for total annual gross income between $250,000 and $500,000; $2,500 for gross income between $500,000 and $1 million; $6,000 for income between $1 million and $5 million; and $11,790 for income more than $5 million.
Because of this fee structure, a major problem has developed for California LLC owners. Individuals using multiple limited liability companies are subject to state-based LLC fees and minimum taxes that are higher than what they would be obligated to pay using a different type of legal entity. Some authors have suggested the use of California limited liability partnerships as a solution. Though for a number of reasons, an LLP may not work as well as an LLC.
Fortunately, an attractive option has surfaced. The state of Delaware has created an LLC with sub-LLC components or divisions. Each division stands alone for liability purposes under Delaware law. While this sub-LLC approach is a new concept, attorneys who have dealt with Delaware LLCs believe California will honor the separate liability structure under the "full faith and credit clause" of the U.S. Constitution. Thus, if properly established and maintained, any adverse legal liability situation for one division will leave the other division unaffected even though there is only one legal entity.
The requirements for this new entity are simple. Each sub LLC or division must be named in the Certification of Formation at the time of organization. Accounting records must be separately maintained for each division. Because Delaware considers the new LLC a single entity, any fee costs to the state of California should be limited to those of a single entity, i.e., one $800 minimum annual tax and a gross receipts fee based upon the entire entity's gross income.
I was recently made aware of this new option by attorney Rob Butterfield, of Butterfield Schechter LLP. If you have any specific questions, contact him at (858) 444-2300 or firstname.lastname@example.org.
Burson is a partner with Grice, Lund & Tarkington LLP. He can be contacted at email@example.com.