WHAT IS A LIMITED LIABILITY COMPANY (LLC)

A limited liability company is a legal entity, separate and distinct from its owners, created for the purpose of conducting business. In California, limited liability companies are governed by the Beverly-Killea Limited Liability Company Act, which starts at California Corporations Code section 17000.

Professional Services Information

Pursuant to California Corporations Code section 17375, a domestic or foreign limited liability company may not render professional services, as defined in Corporations Code sections 13401(a) and 13401.3. Professional services are defined as:

Any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, the Osteopathic Act or the Yacht and Ship Brokers Act.

If your business is required to be licensed, registered or certified, it is recommended that you contact the appropriate licensing authority before filing with the Secretary of State’s office in order to determine whether your services are considered professional.



WHAT NAME CAN I CHOOSE FOR MY LLC?

You may choose any name for your LLC so long as it complies with the following rules:

  • Rule 1: The name of your limited liability company must end with the words "Limited Liability Company," "Ltd. Liability Co." or the abbreviation "LLC" or "L.L.C.
  • Rule 2: You may not use a name that is already in use, or that is similar to a name already in use.
  • Rule 3: The name of your limited liability company may not contain any of the following words: "bank," "trust," "trustee," "incorporated," "inc.," "corporation," or "corp."
  • Rule 4: The name of your limited liability company may not contain the words "insurer" or "insurance company" or any other words suggesting that it is in the business of issuing policies of insurance and assuming insurance risks.

For more on this topic, see California Corporations Code section 17052.


HOW CAN I MAKE SURE THAT THE NAME I WANT IS OK TO USE?

The first thing you should do is try to reserve the name. While there is a cost involved, reserving the name is the ONLY way to make sure it is available and to protect it for 60 days and insure that it complies with all the foregoing rules.

You can reserve an LLC name through us usually the SAME DAY. If you order the Complete LLC Package from us, we automatically reserve your name for you.


WHAT IS THE "ARTICLES OF ORGANIZATION"?
The "Articles of Organization" is that document that, when filed with the California Secretary of State, causes the limited liability company to come into existence. Per California Corporations Code section 17050, the California Secretary of State has a prescribed form for the Articles of Organization. Someone must prepare, execute and file this form in order to create an LLC. You can quickly and correctly prepare this form by clicking here. If you order the Complete LLC Package from us, we prepare this form for you.


WHO IS THE ORGANIZER?

The organizer is the person who signs the articles of organization. The organizer does not need to be a member or manager of the limited liability company - it may be any person or entity.

If you are reserving an LLC name using this website, you must enter the name of the organizer and you must make sure to name the same person as organizer when preparing your articles of organization.


WHAT IS AN OPERATING AGREEMENT? IS IT NECESSARY?
An operating agreement is any agreement, written or oral, between all of the members as to the affairs of a limited liability company and the conduct of its business in any manner not inconsistent with law. See California Corporations Code section 17001 for a more detailed definition.

Yes, an operating agreement is necessary. Per California Corporations Code section 17050, either before or after filing the Articles of Organization, the members must enter into an operating agreement. While an operating agreement may be oral according to the law, there are too many details and legal issues involved to simple rely on a verbal agreement. Having a written operating agreement is the best way to protect your interests and avoid disputes with your fellow members.


WHAT IS AN AGENT FOR SERVICE OF PROCESS?
An agent for service of process is a person designated by the company to accept the delivery of legal papers for a lawsuit. Anyone residing in California can serve as the agent for service of process for a California limited liability company. A person serving as the agent needs to provide his/her complete address in California.

Pursuant to California Corporations Code section 17057, each California limited liability company MUST have an agent for service of process in California.

You can choose to have serve as your agent for service of process. Click here to learn more about using us as your agent.


WHY DO I NEED AN ADDRESS IN CALIFORNIA?
Pursuant to California Corporations Code section 17057, each California limited liability company must continuously maintain an office in California at which certain records are maintained.


WHAT IS A MEMBER?
While there is a legal definition of "member" in California Corporations Code section 17001(x), it is best to think of a member as an owner of the limited liability company (much like shareholders are to a corporation). A member has a bundle of rights in the company known as a "membership interest." These rights include the rights to vote and share in the profits and losses of the business - as well as other rights associated with ownership of a business.


WHAT IS A SPOUSAL CONSENT?

A spousal consent is a document to be signed by the nonmember-spouse of a limited liability company member. By signing the consent, the spouse is agreeing to the terms of the operating agreement and to the fact that the member spouse is the person involved in the business.

A spousal consent is important for the other members to know who their business partners will be. Why? California is a community property state. Non-member spouses may have community property interests in a member-spouse's membership interest. This could have numerous consequences. For example, if a member dies, the spouse's community property right would supercede the transfer provisions of the operating agreement. The other members would then be forced to deal with the spouse of the deceased member.



WHAT IS A CONTRIBUTION OF INITIAL CAPITAL?
A contribution of initial capital is what each member will "put-in" at the start to get the company started. In exchange for their initial capital contribution, each member will receive a proportionate ownership interest in the limited liability company.

The contribution of a person may be in money, property, or services, or other obligation to contribute money or property or to render services. See California Corporations Code section 17200. See also California Corporations Code section 17001(g) for a more detailed definition of what constitutes a "contribution."

There are different tax consequences for different types of contributions. You should seek the assistance of a tax professional in deciding what to contribute as your initial capital.


WHAT IS AN "ECONOMIC INTEREST" IN THE COMPANY
An "Economic Interest" means the right to share in the income, gains, losses, deductions, credit or similar items of, and to receive distributions from, the Company, but does not include any other rights of a Member, including the right to vote or to participate in management, except for any rights enumerated in California Corporations Code section 17106.


WHAT IS THE DIFFERENCE BETWEEN MANAGEMENT BY MEMBERS OR BY MANAGERS?
The Articles of Organization must indicate whether the limited liability company will be managed by its members, or by managers. If management is to be by members, this means that ALL the members will participate in managing the business and affairs of the company. Otherwise, managers will be elected to manage the business and affairs of the company. Managers may also be members but need not be.

EXAMPLE: If there are 4 members in a limited liability company, but only two of them will manage the business and affairs of the company, then those two members will be appointed as managers, and the Articles of Organization should indicate that the company will be managed by more than one manager. If all 4 members were going to participate in managing the business and affairs of the company, then the Articles of Organization would indicate that the limited liability company will be managed by all its members.

Whether management is by members or managers, decisions by the management may be made by either holding meetings or by written consent in lieu of meetings. The operating agreement you may create using this website has slightly different conditions for each situation, as explained below:

Members
Whether holding meetings or taking action by written consent, valid decisions by the members require a majority of the membership interests. This is not necessarily the same as a majority of members. For example, if there are 4 members each owning 25% of the membership interests, then 3 members would constitute a majority. However, if there are 4 members, 1 of which owns 60% of the membership interests, then that 60% member alone would constitute a majority. The "majority" is not by number of people, but by percentage of interests.

Managers
When managers hold meetings, valid decisions require that a majority of the managers be present and vote in favor of any such decision. "Majority" in this case is by number of managers.

In the case of managers taking action WITHOUT a meeting, you must select whether you want a majority of managers or ALL the managers to consent to an action in writing before it is considered valid. Again, "majority" in this case is by number of managers.


WHAT IS A TAX MATTERS PARTNER?
A tax matters partner (or member in the case of a limited liability company ) is that members designated by the limited liability company to be responsible for dealing with the taxing authorities and tax related issues. The Internal Revenue Code requires that a person be designated for this purpose and gives the tax matters member authority to make certain decisions on behalf of the company with respect to tax matters issues.


WHAT IS A MEMBERSHIP INTEREST AND HOW IS IT VALUED?
A membership interest is that bundle of rights owned by each member. These rights include the right to vote and to share in the profits and losses of the company.

A membership interests depends on the value of the company. A company can be valued in a variety of ways. The operating agreement you may create using this website offers two of the most common choices for valuing a business, briefly described as follows:

1) Appraisal Method: Using this method, an appraiser is hired to value the company. If the parties cannot agree to the same appraiser, then each party hires an appraiser. Depending on the results of the appraisals, a third appraiser may need to be hired. This method is more costly then the alternative because of the fees to be paid to an appraiser.

2) Capitalization of Earnings Method: Using this method, the value of the company is based on a twenty-four month "rolling average" of the company's net profits, less debts plus cash. The average figure to be used is multiplied by a "factor" or a "multiplier" as these terms may be known in a particular business industry. The parties must agree in advance to the multiplier, which can be anywhere between 1-20, depending on the type of business and the industry.

In lieu of these methods, this website allows you to formulate and enter your own valuation method for a membership interest.


IN THE EVENT OF A BUY-OUT, HOW WILL PAYMENT BE MADE?
If a member's membership interest in a limited liability company will b purchased, the operating agreement you may prepare using this website allows for payment of the purchase price in one of two ways: 1) a cash payment, or 2) a payment of 20% down, with the remainder to be a loan. While the loan is assumed to be paid on a monthly basis, you must select an interest rate and the number of months required to pay back the loan. Remember, the repayment term is in months, so if you decide upon a repayment of 5 years, you must enter "60" where prompted (because 60 months = 5 years).


THINGS TO CONSIDER

Calculation of a Member's Percentage Interest
The operating agreement you may create using this website equates a member's percentage contribution to his/her ownership interest. By way of example, if you intend to have 4 members each own 25% of the company, then each person should "put-in" a contribution of 25%. Uneven ownership works the same way. For example, assume there are 3 members - Larry, Joe and Moe. Joe and Moe each put in $25,000 each, but Larry puts in $50,000. In this case, the operating agreement is written such that Larry's Percentage Interest is 50% - in other words, he owns 50% of the company. Joe and Moe would each own 25% of the company.

Allocations and Distributions
The operating agreement you may create using this website allocates the company's profits and losses to the members in proportion to their percentage ownership interests in the Company.

Transfer and Assignment of Interests
The operating agreement you may create using this website states as a general rule that a transfer or assignment of membership interest (or any part of it) is void unless all the members unanimously agree to it in writing. This is a modification of the default rule provided by California Corporations Code section 17301(a), which allows a transfer of a membership interest or economic interest if a majority in interest of the members not transferring their interests consent to it. If you wish to create an operating agreement that allows for transfers of interests by majority vote, do not use this website.

Tax Notice
Registration of a limited liability company with the California Secretary of State will obligate a limited liability company that is not taxed as a corporation to pay to the Franchise Tax Board an annual minimum tax of $800.00 and a fee based on the annual total income of the entity. The tax and fee are required to be paid for the taxable year of registration and each taxable year, or part thereof, until a Certificate of Cancellation is filed with the California Secretary of State. (Rev. and Tax. Code §§ 17941 and 17942.)

A limited liability company is not subject to the taxes and fees imposed by Revenue and Taxation Code sections 17941 and 17942 if the limited liability company did no business in California during the taxable year and the taxable year was 15 days or less. (Rev. and Tax. Code § 17946.)


GET AN EMPLOYER ID NUMBER (a.k.a. Tax ID #)

Obtaining an Employer Identification Number is easy, fast, and best of all - its FREE! You do not need to pay anyone to get an EIN for your LLC. Simply go directly to the IRS's website at:
http://www.irs.gov/businesses/small/article/0,,id=102766,00.html
Instructions and information about the EIN are all found on the IRS's website.


FILE A STATEMENT OF INFORMATION
For limited liability companies, California requires that a Statements of Information be filed with the Secretary of State within 90 days of organization and every two years thereafter. Also, if the name or address of the company's agent for service of process has changed, then the company must file a Statement of Information.

While the California Secretary of State allows corporations to e-file their Statement of Information, at this time limited liability companies must use the old-fashioned method of filling-out a form and mailing it in with any applicable filing fees.

If you have hired as your agent for service of process, then we have emailed you the form you need. Otherwise, you may click here to get the form and instructions:

http://www.ss.ca.gov/business/llc/forms/llc-12r.pdf


LEGAL DISCLAIMER
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The material above is NOT a complete explanation of the law regarding the form's subject matter -- it only provides specific legal information regarding the associated form. It is not intended to provide information outside the scope of the associated form. It is intended to explain only certain legal concepts in simple terms in order to help the reader understand what the form is for and how it's generally used.

Also, the above information is not legal advice. It is GENERAL legal information that merely states the law. If you need legal advice about your own particular situation, you must hire an attorney that can listen and apply the law to your specific facts. Online Self-help Legal Tool for California Forms cannot and does not practice law and cannot help you with your individual problem.

Also, the foregoing information and the form related hereto pertain only to California law, unless indicated otherwise at the top of the corresponding . This website does not have information regarding federal law or the laws of other states.