The California Limited Liability Company Act regulates LLCs in the state. What is an LLC? This business entity is a type of hybrid between two traditional business entities, the professional partnership and the corporation. It is commonly used for professionals, like attorneys, and small business owners. Members of an LLC own the company, yet they have limited personal liability for any court judgments or debts against the company.
California's limited liability company laws were changed as of 2014. The former law was replaced by the California Revised Uniform Limited Liability Company Act (RULLCA).
What Is a Limited Liability Company?
Business people are always on the lookout for legal ways of shielding their own individual bank accounts from company debts and liabilities. Corporations were the first answer. However, corporate formations proved a cumbersome and impractical solution for small groups of professionals. Then lawmakers introduced the limited partnership as an entity that people could use to own investment real property. Yet, professional partnership laws offered an inadequate liability shield.
In the late 1970s, the California legislature combined features of the corporation and the limited partnership into a hybrid entity called the limited liability company, or LLC. Many experts believe that this is the best entity for California businesses and investment real estate holding companies since it limits liability of individual members for business debt without requiring the complex corporate structure.
Why Form an LLC?
The Limited Liability Company structure is popular because it offers an appealing combination of flexibility and protection. The big advantages are member protection from liability and flexible taxation options.
A primary benefit of incorporating a business is that this business structure shields the owners from personal liability. If the corporation owes large amounts to creditors or incurs substantial court judgments, only corporate assets are at risk. Like corporations, LLCs shield members from personal liability for debts so that creditors cannot go after the personal assets of an LLC's members. Neither a sole proprietorship nor a traditional partnership offers this shield.
In addition, the members of the LLC get to decide what taxing arrangement works best. A one-person LLC can be treated as a sole proprietorship for tax purposes, through the single member’s personal federal tax return. Partners in an LLC can opt to pay taxes as a traditional partnership. But members can also elect to file taxes for the LLC as if they were corporation.
How to Form a LLC in California?
Forming a California LLC requires a number of official documents, and it is typical for those forming an LLC to work with attorneys or other professionals experienced in this area of the law. It requires three basic steps:
- Filling out and filing with the Secretary of State the Articles of Organization form (Form LLC-1) together with a filing fee of $70
- Within 90 days from the date the Articles of Organization are filed, filling out and filing with the Secretary of State a Statement of Information form (SOS LLC Form-12)
- Paying an $800 minimum tax to the California Franchise Tax Board
Generally, the members of the LLC also draft an Operating Agreement which all of them sign. This is discretionary but considered essential for multi-member LLCs, other than perhaps a married couple. It is usually in this operating agreement that the members set out how they wish the LLC income to be taxed.
Revised Uniform Limited Liability Company Act
The initial law authorizing LLCs in California was the Beverly-Killea Limited Liability Company Act. In 2014, the California legislature replaced this with the Revised Uniform Limited Liability Company Act ("RULLCA"). The new, uniform law imposes significant changes in the way California LLCs are governed. It also adds default provisions to LLC operating agreements if issues are not addressed specifically.