California Law on Corporations Vs. LLPs

by Joe Stone

California law recognizes several types of legal entities, two of which are corporations and limited liability partnerships, or LLPs. Although a corporation can generally engage in any lawful business, California law limits an LLP to certain licensed professions: architecture, public accountancy, engineering, land surveying and legal practice. The primary law governing the creation of corporations and LLPs is set forth in the California Corporations Code.

Corporation Basics

To form a California corporation, an incorporator must file a document called the Articles of Incorporation with the California Secretary of State that complies with Corporations Code section 202. The secretary's office does not specify a particular form for the articles; however, on its website, it does provide a template form that the incorporator can fill out online or print out. The minimum information the Articles of Incorporation must contain include the corporation's name, the name and address of the registered agent, as well as a statement that the corporation will engage in any lawful activity for which a corporation may be organized under the General Corporation Law of California, or the specification of a particular licensed profession. The incorporator must sign the document. The corporation comes into existence when the secretary's office accepts the articles for filing.

LLP Basics

Corporations Code section 16953 states that a partnership becomes a registered LLP by filing the appropriate form with the California Secretary of State. Unlike a corporation that comes into existence by filing with the state, the LLP must already exist as a general partnership as a prerequisite to registering with the state. The secretary's office provides a mandatory form for registering an LLP, called an Application to Register a Limited Liability Partnership, or LLP-1. An authorized partner must file the form, which he can fill out online on the California Secretary of State website, or print it out from the site.

Limited Liability

The liability of the corporation's shareholders for the debts of the corporation is limited to the amount of their investments in the corporation. The shareholders' personal assets are not at risk of liability for the corporation's debts. This is in contrast to a general partnership where each of the partners has unlimited liability for the debts of the partnership. By registering as an LLP, the partners limit their personal liabilities for the debts of the partnership, provided that they comply with the security requirements of Corporations Code section 16956; an LLP is required to meet certain insurance requirements covering professional negligence or maintain a net worth sufficient to cover negligence claims.

Taxation

Corporations and LLPs differ regarding default income tax status. An LLP is taxed as a partnership with the profits and losses of the partnership flowing to the partners. The LLP is not a tax-paying entity. A corporation is a tax-paying entity. This presents a "double-taxation" problem for the corporation because the corporation's profits are taxed and, after distribution as a dividend to the shareholders, the profits are taxed again as income to the shareholders. To avoid this situation, some corporations change the default, Subchapter C tax status by electing to be taxed under Subchapter S of the Internal Revenue Code, which allows the corporation to be taxed as a partnership.