California LLC Act

by Joseph Scrofano J.D./M.A.

Limited liability companies are business entities created by state law. They combine aspects of corporations, partnerships and sole proprietorships. The California LLC Act is located in Title 2.5 of the California Corporations Code. These laws govern LLCs in California. The Secretary of State of California enforces the laws regarding LLCs.

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Forming a California LLC

Owners of a prospective LLC must choose a name for the LLC, file Articles of Organization and a Statement of Information with the California Secretary of State and pay the appropriate fees. The LLC’s name must not have the same name as another California business nor be deceptively similar to another California business. The name must include the words “limited liability company” or the letters “LLC” after the name. The Articles of Incorporation must include the LLC’s name, the LLC’s purpose and the name and address of the registered agent. The owners, who are known as members in an LLC, must also elect whether they want to manage the company themselves or have separate managers. Finally, at least one LLC members must sign the document. The Statement of Information must include the names and addresses of the LLC’s members as well as the information for the LLC’s chief executive officer. As of 2010, the appropriate fees that LLC members must pay to the Secretary of State are $70 for the Articles of Organization and $20 for the Statement of Information.

Taxing a California LLC

One main advantage to forming an LLC is the flexible tax structure. Single-member LLCs can elect for the IRS to tax them as a sole proprietorship. Multi-member LLCs can elect to be taxed like a partnership. In either case, the profits from the LLC “flow through” to the members and the members simply report the income on their personal income tax returns. However, if the LLC so chooses, it could elect to get taxed like a corporation. Corporations first get taxed as a separate entity and then the individual shareholders get taxed on any income they derive from the LLC.

Managing a California LLC

California law requires that LLC members draft and execute an operating agreement. The operating agreement details how the members intend to fund and manage the LLC as well as how the members intend to share profits and losses. The members do not have to file this document with the Secretary of State, but they do have to keep a record of this document.

Dissolving a California LLC

The members can state in the Articles of Organization when they intend to dissolve the LLC. On the other hand, the members can state that the LLC will operate indefinitely. In addition, the members can state in the operating agreement what set of events would trigger the dissolution of the LLC. A California or federal court could order the dissolution of an LLC based on their equitable powers. If a California LLC dissolves, California law requires that the members file a Certificate of Cancellation with the Secretary of State.