Limited Liability Companies
In general: Effective September 30, 1994, California provides a new option in which to conduct business ~ the Limited Liability Company (LLC). California is the 46th State to authorize Limited Liability Companies, which have limited liability identical to that of a Corporation, and taxation exactly the same as a Partnership. An LLC files a Partnership Tax Return. California imposes a minimum tax of $800 PLUS a sliding scale amount based on the gross income: $-0- if the gross income is less than $250,000; the top rate is $4,500. The California gross receipts tax seems inherently unfair. [Taxes should be based on profits, not gross receipts.] Due to the high tax cost, an LLC might not be right for every business. However, every new business should consider it as an available alternative. Additionally, California based LLCs may not be used for professional services (medical, legal, accounting, etc.) or by those listed in the California Business and Professional Code, with a few exceptions.
As with most states, the California Limited Liability Company (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 documents that form an LLC are a hybrid of "Corporate Articles of Incorporation" and a "Partnership Agreement." An LLC may be managed by either: all members; elected members; or managers who are not members.
Two members required: Unlike a corporation which can have as few as one shareholder, most states require that an LLC consist of two or more members (owners). Recently, however, more states are allowing single-member LLCs. Please note, however, that the IRS may treat a single person LLC differently than an LLC with more than one member.
Separate Legal Entity: Like limited partnerships and corporations, an LLC is recognized as a separate legal entity from its "members."
Limited Liability: Ordinarily, only the LLC is responsible for the company's debts thus shielding the members from individual liability. However, there are some exceptions where individual members may be held liable:
Guarantor Liability: Where an LLC member has personally guaranteed the obligations of the LLC, he or she will be liable. For example, where an LLC is relatively new and has no credit history, a prospective landlord about to lease office space to the LLC will most likely require a personal guarantee from the LLC members before executing such a lease.
Alter Ego Liability: Very similar to the judicial doctrine applied to corporations where a court may hold the individual shareholders liable where the business entity is merely the "Alter Ego" of its shareholders, a member of an LLC may also be held liable for the LLCs debts if the court imposes its "alter ego liability" doctrine.
Please note, however, that although a corporation's failure to hold shareholder or director meetings may subject the corporation to alter ego liability, this is not the case for LLCs in California. An LLC's failure to hold meetings of members or managers is not usually considered grounds for imposing the alter ego doctrine where the LLC's Articles of Organization or Operating Agreement do not expressly require such meetings.
Management and Control: Management and control of an LLC is vested with its members unless the articles of organization provide otherwise.
Voting Interest: Ordinarily, voting interest directly corresponds to interest in profits, unless the articles of organization or operating agreement provide otherwise
Transferability: No one can become a member of an LLC (either by transfer of an existing membership or the issuance of a new one) without the consent of members having a majority in interest (excluding the person acquiring the membership interest) unless the articles of organization provide otherwise.
Duration: Although many states now allow an LLC to have a perpetual existence, LLC's traditionally were required to specify the date on which the LLC's existence will terminate. In most cases, unless otherwise provided in the articles of organization or a written operating agreement, an LLC is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy of a member (unless within 90 days a majority in both the profits and capital interests vote to continue the LLC).
Formalities: The existence of an LLC begins upon the filing of the Articles of Organization with the Secretary of State. The articles must be on the form prescribed by the Secretary of State. Among the required information on the form is the latest date at which the LLC is to dissolve and a statement as to whether the LLC will be managed by one manager, more than one manager, or the members.
To validly complete the formation of the LLC, members must enter into an Operating Agreement. This Operating Agreement may come into existence either before or after the filing of the Articles of Organization and may be either oral or in writing.
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