LLC Lawyer in San Diego
California LLC Explained
As a San Diego Limited Liability Attorney I provide companies with information about the LLC in California. For more information, please feel free to call me at (619) 800-0676.
Technically, a limited liability company is a legal fiction. LLCs were not even legal in San Diego (California) until recently. The corporate form of an LLC was created by the legislature, through statutory law, that allowed for the protection of business owners. Normally to escape liability a business owner could not participate in managing the company. The limited liability allowed for in an LLC is equivalent to a corporation but asked in many respects like a sole proprietorship or general partnership. The Beverly-Killea Limited Liability Company Act governs limited liability companies in California.
[udesign_icon_font name=”fa fa-check” color=”#2113dd” size=”2.5em”] Form a California LLC
To form a limited liability company , articles of organization filed with the secretary of state in Sacramento. Usually the articles of organization adopt an operating agreement which governs the parties. Please review the steps to forming a California LLC.
[udesign_icon_font name=”fa fa-check” color=”#2113dd” size=”2.5em”] Manage a California LLC
By default members of an LLC have equal management powers within the limited liability company and therefore each member is an agent similar to how partnerships work. Fiduciary duties attach. However the LLC is very flexible in that members may decide to organize their company but a management structure similar to a corporation by delegating certain powers and responsibilities to one or more members who become appointed managers. In this type of LLC structure the managers become responsible for contracting and the members, so far as liability is concerned, are similar to the limited liability partners within a partnership.
[udesign_icon_font name=”fa fa-check” color=”#2113dd” size=”2.5em”] Transfer/Sell Interest
Transferring a percentage interest of an LLC is very similar to the transfer of interest in a partnership. The members of the company are often the operators in addition to being owners. The operating agreement controls transfers of interest and members can be quite liberal at a formation stage as to how they want to control future transfers of interest. However, absent anything to the contrary in the operating agreement transfers must be unanimously approved by all the members. A new member is usually restricted from participating in the management of the limited liability company but is entitled to a share of the profits, in proportion to the transferred interest. At the death or retirement of a member of the LLC, the LLC is usually by default dissolved unless some of the remaining members vote to keep it alive. This is covered in the LLC’s operating agreement.
[udesign_icon_font name=”fa fa-check” color=”#2113dd” size=”2.5em”] Shield Liabilities of Members
As you a general rule, the members of the limited liability company and the managers are not liable for the debts and obligations of the LLC. The only liability a member or manager of an LLC see really has is for unpaid capital contributions. This means that in exchange for a percentage interest in the limited liability company a member may be required to pay cash at a capital contribution at the time the percentage interest is granted, or there may be a condition stated in the articles of organization which requires that the member make a future capital contribution. Therefore while members and managers are not liable for debts and obligations of the business activities, they are liable for the capital contributions they promised to provide, as delineated in the operating agreement.
[udesign_icon_font name=”fa fa-check” color=”#2113dd” size=”2.5em”] Advantages of a California LLC
The first major advantage to a limited liability company is that they can be treated as a partnership for taxation purposes. This is a distinct advantage over both a C-Corporation and an S-Corporation. An LLC has the option to flow in income to its members similar to a partnership and for taxation purposes all of the income and loss of the company is allocated under the rules applicable to partnerships. Once the company is liquidated an LLC can avoid the recognition of gain by electing to be taxed as a partnership.
The second main advantage to limited liability company is that a members income is taxed only two ways : either as a guaranteed payment, or as a distribution. This is slightly different from a corporation where officers who are also shareholders may not have unreasonable compensation as salary. Some portion of the salary would be disallowed and would be taxed as a shareholders dividend.
The third major advantage to limited liability company is that they are incredibly flexible in comparison with the S-Corporation. While the S-Corporation may not have more than 75 shareholders LLC’s are not limited in that respect. S-Corporation shareholders cannot own more than 80% of another corporation’s stock if their voting power is equal to their percentage ownership. LLCs are permitted to specially allocate income deductions losses or gains among their members and to make disproportionate distributions to their members. S-Corporations cannot. The IRS has penalties for S-Corporations which exaggerate passive income and allocate too much to gains. LLC’s do not have that problem.
The fourth major advantage of a limited liability company is that it is easy to operate . That is the formalities involved in operating a corporation do not exist within LLC. This means that owners of an LLC do not have notify all members of meetings, or even have annual meeting of the shareholders, or meetings of the directors, or voting of officers and directors. The duties of the members are defined in the operating agreement. The operating agreement is not filed publicly. When the members wish to attend the articles of organization it is easy. In contrast when articles of incorporation are amended it could easily affect other stock, specifically classes of stock that require majority approval of the shareholders. This is because in a corporation when amending the shareholder agreement, the designated classes of stock must vote in agreement. LLC’s generally do not have this problem unless it is stated in the operating agreement.
[udesign_icon_font name=”fa fa-forward” color=”#2113dd” size=”2.5em”] Disadvantages of a California LLC
The big disadvantage to limited liability company is that the fringe benefits available to shareholder employees of incorporation are not available to members of an LLC. This means that tax free life insurance benefits, medical benefits, cafeteria plans for employees, which are usually available to employees of the corporation are not available to employees of an LLC. Sometimes the marginal tax rate of the member is higher than the corporate tax rate.
[udesign_icon_font name=”fa fa-balance-scale” color=”#2113dd” size=”2.5em”] Compare LLC & Partnership
The owners of an LLC are called members. In partnerships there are general partners and limited partners. The biggest distinction is that members are not liable but partners are liable for the debts and obligations of the company. This means that members LLC have limited liability. General partners and managing members may act to bind company in the ordinary course of business. However a member who is not a manager cannot bind the company, just as a limited partner cannot bind the partnership. Another big difference is that a general partner can dissolve the company by leaving but when a member leaves the LLC does not necessarily terminate or dissolve.
By law every limited partnership has one partner who acts as the general partner who is liable for the obligations of the partnership. Members of an LLC have limited liability even if they participate as manager of the company. This is easily fixed problem because a corporate general partner position can be created, however this may make things little too complicated for small businesses.
[udesign_icon_font name=”fa fa-money” color=”#2113dd” size=”2.5em”] Taxation of an LLC
The beauty of an LLC is that it may choose to be taxed either as a sole prorprietorship, partnership, or as a corporation. This means that an LLC may elect to be treated as a C-Corporation, S-Corporation, partnership, or sole proprietorship. Take your pick.
Article By Attorney Christopher Canton
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