Organic Concepts Llc
organic concepts llc
Types of LLCs and Steps to LLC Formation
Copyright (c) 2011 Jeffrey Matsen
Only one person is necessary to organize a California LLC and he/she need not be a member or manager. The California Secretary of State furnishes Form LLC-1 which must be used for the Articles of Organization. The Articles may contain additional provisions including, but not limited to, limitations and restrictions on the business in which the LLC engages, admission of members, powers that may be exercise, events causing a dissolution, or limitations on the authority of managers or members and the name of the initial managers. The filing fee for the LLC-1 is $70.00. The name must include the following: “limited liability company”, “L.L.C.”, or “LLC”. The words “limited” and “company” may be abbreviated as “LTD. and “Co.”, respectively.
An LLC may be set up to engage in any lawful business activity, “except the banking, insurance or trust company business”. However, the use of an LLC for the practice of licensed professions and occupations is generally prohibited.
The Beverly-Killea Limited Liability Company Act which governs LLCs (the “Act”) in California does not require that the “Operating Agreement” be in writing, but it obviously should be. An Operating Agreement is similar to a partnership agreement in that it covers generally the same types of provisions. The following provisions of the Act can only be varied by the Articles or a written Operating Agreement:
1. Vesting of power only in members to adopt, alter, amend or repeal the Operating Agreement.
2. Voting rights of members.
3. Actions requiring majority or unanimous vote.
4. Location of meetings, calling of meeting adjournment, actions, participation, proxies, quorum, and determination of members of record.
5. Election, removal, resignation and expiration of term of manager.
6. Appointment and removal of officers.
7. Provision for indemnification except for breach of fiduciary duty of manager.
8. Fiduciary duties of manager with informed written consent of members.
The Articles and Operating Agreement cannot do any of the following:
1. Vary statutory definitions.
2. Eliminate a right of a member to assert that termination of his interest and return of contribution was unreasonable.
3. Allow amendment of Articles by less than a majority in interest.
4. Abridge right of a member to vote on dissolution or merger.
5. Deny rights of a member or a holder of an economic interest or limited liability company to information and inspection of required records.
6. Change requirements for formation.
7. Change provisions concerning dissolution.
8. Change provisions concerning class of derivative actions.
9. Change rights of dissenting members to a reorganization.
10. Change the rights of a member obligated to provide services to the LLC to withdraw without prejudice to contract rights of the LLC.
If the LLC has managers, the LLC-1 should so state, but the number (unless only one) and names are not needed for the LLC-1. Managers may be removed without cause by a vote of majority in interests. However, the Articles or Operating Agreement may eliminate or modify the right of members to remove managers. A member managed LLC is more like a typical general partnership, because each member has a vote and, perhaps, even a veto with respect to the management and control of the company business. A manager managed LLC is more like a limited partnership where the general partner (manager) manages the company and the limited partners (other members) are more like passive investors.
Unless otherwise provided in the Articles or a written Operating Agreement: Members in an LLC vote according to their interest in current profits. Moreover a unanimity of members is required to amend the Articles or Operating Agreement. Generally, each member in a member managed LLC has an equal right in management. A vote of a majority in interest of the members controls. A majority vote or unanimous written approval of managers is required for manager decisions in a manager managed LLC. Any manager or members representing more than ten percent of the interest in current profits may call meetings. Regardless of any provision in the Articles or the Operating Agreement, majority in interest of the members is required to amend the Articles or Operating Agreement and members must vote on dissolutions and mergers.
Manager has a fiduciary duty similar to that of a partner to a partnership and to the partners of the partnership.
The LLC may be structured so that there are officers and even directors similar to the organization of a corporation. Such structure needs to be set forth with some specificity in the Operating Agreement.
Members will only have personal liability under the same or similar circumstances and to the same extent of the shareholders of a corporation. There are differences, however. Most Operating Agreements do not require the formalities of meetings and resolutions that must be maintained by a corporation with respect to the preservation of its autonomy and the integrity of the separate legal entity.
Members will have personal liability for LLC debts in the following instances:
1. Personal guarantee of LLC debts;
2. Personal participation in tortuous conduct;
3. Receipt of unlawful distributions from the LLC; or,
4.With respect to veil piercing, the same concepts and analysis would apply as with to piercing the corporate veil. Absent fraud and commingling the LLC shield like the corporate shield should prevail.
The LLC is prohibited from making distributions to members if after the distribution the LLC is either not able to pay debts as they become due or total assets are less than total liabilities.
The office in California of a California LLC has to maintain records for inspection by members including a list of names and addresses of members and managers, copies of the Articles, copies of tax returns, financial statements, the Operating Agreement, books and records for the current and the past four years, and, upon request of an assessor, business records of the cost and value of the property owned. The office for record keeping need not be the same as the office of a service agent.
Unless otherwise provided in the Articles or the Operating Agreement, the consent by a majority in interest is required for transfers of member interests. Members can transfer their “economic interest” which does not include management and voting rights.
The dissolution of an LLC occurs on the first to occur of the following:
1. Date specified in the Articles;
2. Occurrence of an event or events specified in the Articles or Operating Agreement.
3. Vote of a majority in interest or greater percentage as specified in Articles or Operating Agreement.
4. Entry of decree of judicial dissolution. The LLC in dissolution continues in existence for the winding up of its affairs.. Ultimately, a Certificate of Dissolution is due.
Within ninety days after filing the Articles or Application for Registration of a foreign LLC, every LLC must file a Statement of Information on Form LLC-12. Thereafter, the LLC-12 must be filed on an annual basis. LLC-12 requires names and addresses of the managers, if a manager managed LLC, or of all members, if member managed, and of the Chief Executive Officer, if any. In this regard, it should be noted that the use of a manager managed LLC eliminates the names of the members as a matter of public record.
An LLC must pay $800 to the Franchise Tax Board on the 15th day of the 4th month after the beginning of its fiscal year. For the first year it is the 15th day of the 4th month from the date the LLC was organized.
LLCs are subject to a gross receipts tax imposed by the Franchise Tax Board. For LLCs whose revenue is between $250,000 and $499,999, the additional fee is $900. The fee increases to $2,500 for revenues between $500,000 and $999,999, to $6,000 for revenues between $1,000,000 and $4,999,999 and to $11,790.00 for revenues of $5,000,000 or more. (See California Corporations Code Section 17942(a)(123).
The members of an LLC have great flexibility in determining its structure and organization. The Operating Agreement can be designed so that the LLC resembles a prototype General Partnership which would normally provide for the members to be the managers of the Company. On the other hand, if the organizers want the entity to more closely resemble a Limited Partnership than a manager managed LLC with limited rights of the members can be set up. It is also possible to structure the LLC in more of a corporate format with By-laws, a Board of Directors and Officers. In fact, the LLC can take on almost any form the members wish. On the other hand, a Limited Partnership inherently limits the management and control of the limited partners, placing most of the operational and policy decisions and authority in the general partner.
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