Legal Question in Business Law in California

Hello,

Please see my numbered responses below.

1. There would be no effect on the business from an operational standpoint, between an LLC and a partnership.

2. Since an LLC can elect to be treated as a partnership for tax purposes, there would be no impact with respect to a 1031 exchange.

3. Formation of an LLC can be completed for as little as a couple hundred dollars using an online filing service and form documents; however, you are not very well protected. In order to be better protected, an attorney should be involved and rates for LLC formations with an attorney typically start at approximately $1200 depending on the complexity and terms of the agreement.

4. The State of California imposes an annual $800 minimum fee for the privilege of doing business in California as an LLC.

5. If you elect to have your LLC treated as a partnership for tax purposes, you would report your taxes individually as you do now. Otherwise, you can chose to be taxed as a corporation, but this is typically not recommended because you will end up paying tax twice.

Feel free to call us if you have any specific questions.

Kindly,

There are some costs and nuisances associated with converting a business from a partnership to an LLC (or to an S corporation), but they can generally be handled and the advantages of the LLC are substantial. I'll try to give some rather general answers to your questions:

(1) A business buyer's main focus will be on the past profitability and future prospects of the business, not how it is organized, but I do believe most buyers would rather deal with a well-organized LLC than a partnership.

(2) Investors cannot use partnership interests, per se, in the 1031 swap marketplace, but the partnership itself can do 1031 exchanges. Careful pre-planning and expert advice at each stage is absolutely necessary. Try using search terms "partnership 1031 exchange" in a Google search.

(3) A general partnership can be converted into a limited liability company under provisions of the Corporations Code found at sections 16901, et seq. You will note that CC 16909 provides that the converted entity is "for all purposes the same entity that existed before the conversion." This will in most circumstances make it unnecessary to renegotiate the contracts of the partnership upon its conversion. Each contract should be reviewed by a business attorney for possible consequences; however, I would not expect many, if any.

(4) Yes. LLCs pay an $800 per year franchise tax, plus a small but graduated tax based upon revenues. Many consider this worth while as cheap liability insurance.

(5) LLCs, other than single-member LLCs, can elect to be taxed as partnerships or as corporations. Most elect partnership-style taxation, as you have now.