A California contractor wants to form a business entity that provides personal liability protection while allowing pass-through taxation. Which entity type would best meet these requirements?
Correct Answer
B) Limited Liability Company (LLC)
An LLC provides personal liability protection for its members while allowing pass-through taxation, avoiding double taxation. Sole proprietorships and general partnerships don't provide liability protection, while C corporations have double taxation.
Why This Is the Correct Answer
A Limited Liability Company (LLC) is the ideal structure when both personal liability protection and pass-through taxation are required. Members of an LLC are shielded from personal liability for business debts, while the LLC's income passes through to members' personal tax returns — avoiding the double taxation that corporations face. California law specifically permits contractors to operate as LLCs, subject to CSLB licensing requirements.
Why the Other Options Are Wrong
Option A: Sole Proprietorship
A Sole Proprietorship provides no separation between the owner and the business. The owner is personally liable for all business debts and obligations, which directly fails the liability protection requirement stated in the question.
Option C: General Partnership
A General Partnership does not provide personal liability protection. Each general partner is jointly and severally liable for the partnership's debts and obligations. While it does offer pass-through taxation, it fails the liability protection test.
Option D: C Corporation
A C Corporation does provide personal liability protection, but it is subject to double taxation — the corporation pays tax on its income, and shareholders pay tax again on dividends received. This directly contradicts the 'pass-through taxation' requirement in the question.
Memory Technique
Use the two-column test: (1) Liability protection? Sole prop = No, Partnership = No, LLC = Yes, C Corp = Yes. (2) Pass-through taxes? Sole prop = Yes, Partnership = Yes, LLC = Yes, C Corp = No. Only the LLC gets two 'Yes' checks.
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XYZ Contracting LLC has 8 employees in California. An employee is injured on the job and requires medical treatment costing $15,000. The company has no workers' compensation insurance. What is XYZ's potential liability?
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