Form A Limited Liability Company

WHAT YOU NEED TO KNOW ABOUT CALIFORNIA LIMITED LIABILITY COMPANIES

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A California limited liability company ("LLC") is a hybrid between a partnership and a corporation. An LLC combines the “pass-through” tax treatment of a partnership with the limited liability accorded shareholders in a corporation.

Like a corporation, which can have as few as one shareholder, an LLC is required to have only one “member” (i.e., owner).

Like limited partnerships and corporations, an LLC is recognized as a legal entity separate and apart from its “members” .

Generally speaking, only the LLC can be held responsible for the LLC's debts. Subject to certain narrow exceptions, LLC members are not personally liable for the entity's obligations and/or liabilities. Of course, LLC members may be personally liable for the LLC's obligations if they have personally guaranteed the obligations.

Management of an LLC's business and affairs is vested in all its members unless the articles of organization provide otherwise. Where the articles do not provide for managers, LLC members' management and control rights are similiar to those of general partners in a general partnership.
Ordinarily, in an LLC, a member's voting interest corresponds to the member's interest in the profits of the LLC. Each member has the right to vote in proportion to such member's interest in the current profits of the LLC, unless the articles of organization or operating agreement provides otherwise.

Where the LLC is managed by all its members (as opposed to a manager managed LLC), each member is deemed an agent of the LLC in dealings with third persons and can bind the LLC in the same way a general partner can bind the partnership. A member's acts may bind the LLC, but since members are generally not personally liable for LLC obligations, the acts would not subject the other members to personal liability. This is in contrast to general partners, whose acts could lead to personal liability on the part of other partners.

An LLC's articles of organization may provide for “centralized management”—i.e., that the LLC's business and affairs shall be managed by or under the authority of one or more designated managers. Managers need not be members. LLC managers owe the same fiduciary duties of care and loyalty to the LLC and all its members as are owed by a partner to a partnership and its partners.

No LLC manager is personally liable for any LLC debt, obligation or liability solely by reason of being a manager.

Unless otherwise provided in the LLC's articles of organization or operating agreement, no one can become a member of the LLC—either by issuance of a new membership or transfer of an existing one—without the consent of members having a majority in interest, excluding the vote of the person acquiring the membership interest.

Like a partner in a partnership, an LLC member can freely assign his or her rights to share in profits, losses, distributions, etc. (i.e., “economic rights”) without causing a dissolution of the LLC, unless otherwise provided in the articles or operating agreement. However, such assignment may not transfer or effect any substitution of the member's voting, inspection and other rights except with the required consent of the other members.

An LLC is dissolved (1) at the time (if any) specified in the articles of organization, (2) upon the events (if any) specified in the articles or a written operating agreement, or (3) by the vote of a majority in interest of its members (or such greater percentage as may be specified in the articles or a written operating agreement). This gives the LLC a somewhat more reliable continuity of interest than a partnership because the death, withdrawal, resignation, bankruptcy, etc... of an LLC member does not trigger a buy-out or dissolution of the LLC (unless the articles or operating agreement provides for a buy-out or dissolution upon one or more of these events).

A member's capital contribution to the LLC may consist of money, property, services rendered, or a binding obligation to contribute any of these, as provided in the articles or operating agreement.

LLC profits and losses are distributed among the members as allocated by the operating agreement; otherwise, they are allocated in proportion to each member's capital contribution.
The existence of an LLC begins upon the filing of articles of organization with the Secretary of State. To complete the formation of an LLC, the members must enter into an operating agreement.

A business rendering “professional” services requiring a license, registration or certification under the California Business and Professional Code cannot operate as an LLC unless expressly authorized by statute. Although the term “professional” services has no precise definition, it likely refers to services that may lawfully be performed by a “professional corporation,” such as law, medicine, dentistry and accountancy. At present, the only such business expressly authorized by statute to operate as an LLC is that of insurance agents and brokers, who may conduct business as an LLC so long as they provide security for claims and observe other statutory and regulatory conditions.

A member's tax basis equals the member's contribution to the LLC adjusted for the member's share of income (or losses) and distributions. Basis is also increased by the share of LLC debt allocated to the members in accordance with their membership interests ... unless a particular member bears the economic risk of loss with respect to the obligation (i.e., where a member has personally guaranteed an LLC liability), in which case the portion of the debt for which the member is liable must be included in that member's basis.

With respect to California tax treatment of LLCs, LLCs must pay the same $800 annual franchise tax that limited partnerships and corporations must pay (although corporations are exempt from the minimum tax for their first taxable year).

It is a little known fact that LLCs pay an additional "fee" to the Franchise Tax Board. An LLC having total income of $250,000 or more from all sources that are reportable to the Franchise Tax Board must pay the following additional franchise “fee” based upon the LLC's income level:

Total Income Fee
$250,000 to 499,999 $900
$500,000 to 999,999 $2,500
$1 million to 4,999,999 $6,000
$5 million or more $11,790

Questions about limited liability companies, or forming limited liability companies?

Call Jacobs & Dodds at (949) 645-7300

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If you would like more information about limited liability companies, visit the California Secretary of State's web site at http://www.sos.ca.gov/business/bpd_forms.htm#llc

Incorporate in California

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Corporations

A California corporation is a distinct legal entity separate and apart from its officers, directors and shareholders. As a result, a shareholder, officer or director is not the employer of those working for the corporation, nor are they considered the owner of the corporate property. As a separate legal entity, a corporation has the power to act in any way permitted by the laws that created it. A corporation can own and convey property. It can sue and be sued. A corporation can commit torts and crimes.

Although a corporation can sue or be sued in its name, with the exception of small claims court, it cannot appear in court and represent itself. Nor can it appear on its own behalf as defendant in a criminal proceeding. In general a corporation must be represented by a lawyer when it appears in a civil or criminal case. Even where a sole shareholder's interests are identical to those of the corporation, a nonlawyer shareholder cannot intervene in the proceeding as a method of circumventing the requirement that the corporation be represented by an attorney.

As a separate legal entity, the corporation is responsible for its own debts. Normally, the shareholders, directors or officers of the corporation are not legally responsible for corporate liabilities. If there are losses in the business, the corporation bears them to the extent of its own resources; the stockholders indirectly bear them in that the value of their stock declines more or less in proportion to such losses. However, the shareholders may be held personally liable for corporate obligations if they have personally guaranteed them or if “alter ego liability” is imposed. They may also be liable for their own tortious conduct in ordering, authorizing or participating in corporate wrongdoing.

As a general rule, management and control of a corporation is vested in the board of directors that are elected by the shareholders of the corporation. The directors generally make policy and major decisions but do not individually represent the corporation in dealings with third parties. Dealings with third parties are conducted through the corporation's officers and employees, to whom authority is delegated by the directors. Although the shareholders elect the board of directors, they do not directly control the board's activities or decisions.

In a corporation, the same persons may be stockholders, directors and officers of the corporation (and usually are in small corporations).

A corporation can be created only by complying with California's General Corporation Law. The law requires filing of articles of incorporation containing certain essential provisions and the prepayment of certain fees, before a corporation can be formed.

As a separate legal entity, the corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers or directors, or by transfer of its shares from one person to another.

Corporations can be "C" corporations, Subchapter "S" corporations, close corporations or under certain circumstances, professional corporations.

"C" corporations pay tax on taxable income generated by the corporation. A "C" corporation is a separate taxable entity in the eyes of the state franchise tax board and the IRS. An "S" corporation has its taxable income treated like the income of a partnership or sole proprietorship. In other words, an "S" corporation is a pass through tax entity. The income or loss of the company is reflected on the tax return of the owners of the company. To qualify as an "S" corporation there must be fewer than 75 shareholders, and the shareholders cannot be non-resident aliens.

For corporations, our law firm will file the articles of incorporation, draft by-laws tailored to the needs of the owners of the corporation, issue the shares of stock, draft a buy/sell agreement, obtain the employer's identification number from the IRS, hold the first meeting of the board of directors and draft the minutes for the meeting, give instructions as to when corporate meetings should be held in the future, provide examples of minutes, and prepare the corporate information form for the California Secretary of State's Office. For Subchapter "S" corporations the Subchapter "S" election form is filed with the IRS. Our firm incorporates a business in two to three business days.

The attorney's fees charged depend on the amount of legal work that is required to properly incorporate the new or existing business. The fees range from $900 to $1,500. In addition to the attorney's fees, the Secretary of State's office charges $100.00. Finally, the cost of the corporate minute book, corporate seal and stocks certificates is approximately $70.00.

Call Jacobs & Dodds today at (949) 645-7300

Forming California Corporations

FORMING CALIFORNIA CORPORATIONS AND LIMITED LIABILITY COMPANIES

Each of the attorneys at Jacobs & Dodds has over 25 years of legal experience in forming California corporations and limited liability companies. Our fees are reasonable. We encourage business owners who are contemplating the formation of a corporation or a limited liability company to give us a call so they can speak with one of our attorneys. There is no charge for telephone consultations.

Contrary to what you hear on the radio, or read on some incorporation web sites, forming a corporation or a limited liability company is not a simple matter. This is why we don't have you just fill out a form online and then send you an incorporation packet in the mail. The moment a company is incorporated, it becomes subject to hundreds, if not thousands of laws, rules and regulations.

The decision to incorporate or form a limited liability company should be made after speaking with a business attorney and a business accountant. Some of factors that should be considered are:

1. How risky is the business?
2. What will the tax benefits be if the business is incorporated or formed as a limited liability company?
3. Is the business seasonal in nature so that the ability to carry income over from one year to the next may be critical from a tax planning standpoint?
4. Are the business owners willing to commit to doing the work that is needed to keep a corporation or limited liability company in good standing with the California Secretary of State, the State Franchise Tax Board and the IRS?

If you are interested in forming a corporation or a limited liability company call our firm today. Call us at (949) 645-7300. Visit us at our web site at www.ocbusinesslawyers.net