Limited Liability Company

1. What is a Limited Liability Company (LLC)?
2. How is a LLC formed?
3. What type of business may form an LLC?
4. How is a LLC managed and controlled?
5. What are some advantages in forming an LLC?
6. What are some disadvantages in forming an LLC?
7. Does a membership interest qualify as a security?
8. Why are LLCs seen as the preferred business entity now?
9. What are some common scenarios where a person would create an LLC?
10. What are the ongoing requirements for operating an LLC?

1. What is a Limited Liability Company (LLC)? (Top)

A business organization with one or more owners, members, who normally do not have personal liability for the debts and obligations of the LLC. Corp C §17101(a).

2. How is a LLC formed? (Top)

An LLC is formed by filing executed articles of organization on Form LLC-1 with the Secretary of State and payment of a filing fee, currently $70. Corp C §§17050(a), 17051 (contents); Govt C §12190(b). http://www.sos.ca.gov/business/llc/forms/llc-1.pdf

Furthermore, either before or after filing the articles of organization, all the members must enter into an operating agreement which sets out basic parameters of the LLC. Corp C §17050(a).

3. What type of business may form an LLC? (Top)

An LLC may engage in any business activity, whether for profit or not for profit, except the banking business, the business of issuing insurance policies, or the trust company business. Corp C §17002(a). Additionally, an LLC may not render professional services as defined in Corp C §§13401(a), 13401.3. Corp C §17375. Professional services entails basically any occupation which requires a license in order to practice: law, medicine, accountancy, etc. Corp C §§13401(a) and 13401.3.

4. How is a LLC managed and controlled? (Top)

An LLC may be managed either by all of the members, a member-managed LLC, or by one or more managers, a manager-managed LLC. This determination is made on Form LLC-1 Item 5. http://www.sos.ca.gov/business/llc/forms/llc-1.pdf

5. What are some advantages in forming an LLC? (Top)

The primary advantage in forming an LLC is that members are, generally speaking, not personally liable for the debts of the LLC. Corp C § 17101(a) For example, if an LLC incurred millions of dollars in debt and could not pay it off, the creditor could not pursue the assets of the members for this deficiency. The importance of this cannot be understated for somebody who is engaged in a lawsuit friendly business such as construction or automotive repair.

6. What are some disadvantages in forming an LLC? (Top)

The main disadvantage is that an LLC must pay an annual franchise tax of $800 for the privilege of doing business in California. Rev & T C §§17941(a), 23153(d)(1)

7. Does a membership interest qualify as a security? (Top)

Whether membership interests in a particular LLC constitute securities (see stock) under the federal securities laws is determined on a case-by-case basis. For example, a membership interest in an LLC constitutes a security under the California Corporate Securities Law of 1968 unless all the members engage actively in the management of the LLC. Corp C §25019.

8. Why are LLCs seen as the preferred business entity now? (Top)

LLCs are popular today, though LLCs have only been around for a couple of decades, since LLCs combine the better attributes of a general partnership, preferred tax treatment, and a corporation, limited liability for LLC debts.

Furthermore, LLCs are easier to manage than a corporation because corporate governance is very regimented: annual meetings must be noticed, mandatory attendance by board members and minutes must be recorded. Whereas an LLC is not legally bound to operate in such a manner, for an LLC may govern itself like a partnership or a corporation. Thus, the LLC offers flexibility in terms of governance that a corporation cannot offer.

9. What are some common scenarios where a person would create an LLC? (Top)

LLCs are advantageous for real estate investments, high-tech ventures, sole proprietorships, and joint ventures.

10. What are the ongoing requirements for operating an LLC? (Top)

In additional to filing annual federal and state tax returns, an LLC is required to file a statement of information with the California Secretary of State biennially (every two years). Corp C §17060. http://www.sos.ca.gov/business/llc/forms/llc-12.pdf