A Limited Liability Company, or LLC is an unincorporated business entity whose members do not have personal liability for the debts of the LLC. In that regard, it has the same advantage as a corporation.
In addition, it has the advantage of a partnership in that it is not subject to Federal or California income tax, as the members are taxed directly on their share of income. An LLC is formed by filing the Articles of Organization with the Secretary of State. Within 90 days after filing the Articles, the LLC must file with the Secretary of State, a statement of information which sets forth general information such as the name of the designated agent for acceptance of service of legal process. All members must enter into an operating agreement, which should be as comprehensive as possible. Thus, it is not as easy to form an LLC as it is to form a corporation.
There is however, a great flexibility in structuring the management of an LLC. The company many be managed by managers who are not members, or by members. The LLC may also appoint officers to run the day to day operations of the company. The right of members to remove managers may be limited by the operating agreement. The management style may be similarly structured to that of a corporation with highly centralized management, or to that of a general or limited partnership.
The agency authority of owners and managers in an LLC depends upon how the LLC is structured. For example, in a member managed LLC, every member is an agent of the LLC, and can bind the company. In a manager managed LLC, every manager is an agent of the LLC.
The Articles of Organization can further limit the liability of members and managers. However, the limitations will not be binding as against third parties having no actual knowledge of the restrictions.
While a member can transfer her economic interest without the consent of the other members, voting and management rights cannot be transferred without the consent of the other members. Capital is raised through capital contributions from members, loans from members, and secured and unsecured loans from third parties.
Normally, an LLC will dissolve upon the death, withdrawal, resignation, expulsion, or bankruptcy of a member, unless either all members vote to continue the business, or the articles of organization provide otherwise.
As stated above, the same limited liability afforded to the shareholders of a corporation typically applies to an LLC. However, because of the additional advantages available to LLC’s which are not available to corporations, the LLC should be seriously considered as an alternative to the formation of a corporation and may very well be the best type of organization for your new business.