Law Offices of David J. Harter

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Articles: Limited Liability Companies

The California Limited Liability Company Act was signed by Governor Wilson on September 30, 1994, making the Limited Liability Company ("LLC") one of the newest form of legal entity in California. The Limited Liability Company was conceived by the Wyoming Legislature in 1977. Today, virtually every state in the nation permits some form of LLC.

Advantages/Disadvantages

An LLC, if properly structured and maintained, has three primary advantages: Its owners (called "members") have the personal liability shield of a corporation; owners also obtain the tax advantages of a partnership; and there is flexibility in the capital structure and management. The disadvantages to an LLC are that it is subject to the $800 minimum annual franchise tax fee , it is simpler to make an initial public offering in a corpoation, and it cannot be used by professionals.

Limited Liability

Members, officer, or manages of a limited liability company are not personally liable for any debt or obligation of the company solely by reason of their ownership interest. The LLC Act specifically limits members' personal liability to that of shareholder in a corporation. However, the liability limitation is even broader in an LLC: There is no "alter ego" theory of liability for owners based on the failure to hold meetings or to observe formalities, as with a corporation.

Formation and Scope of LLC

To form an LLC, the members must enter into an operating agreement and file articles of organization with the Secretary of State. An LLC requires one or more members, and the words, "limited liability company" or the abbreviation "LLC" must appear at the end of its name.

Just as certain corporate and partnership interests are subject to both federal and state securities regulations, unless structured properly the LLC must register its certificates of ownership under both state and federal securities laws. In most cases, however, small-sized and medium-sized companies will be able to structure the LLC to fit within both state and federal securities law exemptions.

After formation, an LLC may engage in any lawful business activity, except banking, insurance, or trust company business. Additionally, an LLC may not render professional services which include services that can only be rendered under a license, certification, or registration.

Members and Managers

Members can be individuals, partnerships, limited partnerships, trusts, estates, associations, corporations, LLCs, or any other entity. There is no restriction on the number of members or the geographic location of the members.

The LLC can be operated by its members, a manager, or group of managers. If operated by managers, the managers can be appointed or elected. The operation of the company can be governed with or without formal meetings and elections. The method for voting can be based on financial interest, per capita, class, group, number, or any other voting method specified in the operating agreement. Essentially, the LLC can utilize any mechanism imaginable for the voting and control of the business.