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Forming California Limited Liability Companies

The organizers have great freedom in creating a limited-liability company ("LLC"): rights and interests can be arranged in ways that are not permitted with corporations or limited partnerships. For example, voting rights, management rights and profit/loss rights need not be related. The organizers therefore have to consider many issues regarding how they want the LLC organized. In addition, there are legal restrictions and relatively complicated tax issues that must be considered as part of this process. This document presents issues that the organizers will want to consider.

Member-Managed v. Manager-Managed.

First, some definitions: A member-managed LLC is similar to general partnership in that each member can bind the entity (i.e. sign binding contracts on behalf of the LLC); with a manager-managed LLC, only the designated manager(s) have authority to bind the LLC. However, with a manager-managed LLC you can still build in member approval of specified decisions.

Articles of Organization and Operating Agreement.

Essentially, the LLC is begun by filing Articles of Organization with the Secretary of State. (Section 17050(a)), along with an $80 filing fee. No Operating Agreement is required–but if one is not used the default provisions of the LLC statutes apply, which many organizers will not want. The Operating Agreement can be entered into either before or after the filing of the Articles of Organization. (However, it is probably wise to do this before filing the Statement of Information (discussed elsewhere in this document), which must be filed within 90 days of the filing date of the Articles.

The Articles of Organization must contain the following:

Items that can't be changed.

Certain items are required by state law and cannot be altered:

Issues to Consider That Differ from the Defaults.

The following are items that organizers will likely want to change through the Operating Agreement:

Allocations and Distributions.

Amendments.

Unless the Operating Agreement provides otherwise, the Operating Agreement may only be amended with the unanimous consent of all the members. However, the Operating Agreement cannot provide for less than a majority-in-interest of the members to amend the Articles. (Section 17103(b).)

Security exemptions.

One current problem with LLC's is that while interests in member-managed LLC's apparently do not constitute "securities" requiring registration with the state and federal governments, interests in manager-managed LLC's are presumed to be securities. However, even if the LLC is manager-managed there are ways around the problem.