A California LLC is a Popular and Versatile Type of Business Entity

March 3, 2012

LLCs provide the limited liability protection of a corporation while offering the tax benefits and flexible management of a partnership.

An article published by Fairleigh Dickinson University observes that limited liability companies are "rapidly becoming the entity of choice" for many businesses of various types and sizes. Similarly, the author of an article published in Forbes Magazine concludes that choosing to form a limited liability company, instead of a Chapter C or S corporation, has become the "new normal" for business entities. As elsewhere, LLCs have become a highly popular form of business entity in the Golden State. The popularity of California LLCs is due to the fact that LLCs offer the tax benefits and flexible management structure of a partnership entity while also offering the limited liability protection of a corporation.

The Revised Uniform Limited Liability Company Act took effect on January 1, 2014, governing California LLCs, replacing the Beverly-Killea LLC Act. The RULLCA, like its predecessor, offers LLC members a great deal of flexibility in crafting operating agreements which meet the specific needs and requirements of LLC members. After determining that an LLC is the business entity that you desire to form, it is absolutely imperative to ensure that an operating agreement is drafted that carefully and accurately spells out the details of the business arrangement such as members' duties, rights and responsibilities.

The RULLCA can be properly viewed as containing the rules which will govern the operation of an LLC by default unless LLC members have in place an operating agreement that specifically addresses how the members desire the business to be run. By having your own operating agreement drafted by an attorney experienced in business entity formation, as opposed to using a "boilerplate" or one-size-fits all operating agreement, you can supersede the default rules otherwise applicable. Operating agreements should always be drafted to anticipate and address possible business problems before they arise.

Pre-2014 LLCs

The RULLCA applies not only to LLCs formed after January 1 of 2014, but also to LLCs in existence prior to that date. According to a recent article appearing in the San Joaquin County Bar Association newsletter, the RULLCA is much more comprehensive in scope than the predecessor act and "addresses a wider range of topics." This could present a problem for some LLC operating agreements drafted years ago. If these older operating agreements are silent on matters now covered by RULLCA, the provisions of the new LLC act will become the default operating rules applicable to the LLC.

By way of example, the RULLCA contains a number of default rules pertaining to when a member may disassociate from an LLC-and the effect of such dissociation-which were notably absent from the old Beverly-Killea LLC Act. These new default rules on member disassociation may not be what members of a particular LLC desire. Therefore, it is suggested that old LLC operating agreements should be carefully reviewed with an eye toward revising them if necessary in order to reflect and carry out the actual intent of the LLC members and thereby "avoid unintended consequences."

Consult an attorney

Those considering forming a business should consult qualified legal counsel to ensure that they select the appropriate business form and understand all relevant state and federal tax consequences. An attorney experienced in business formation can make sure the correct documentation is prepared and filed. If you have questions about the possible advantages and disadvantages of setting up a California LLC versus a C or S corporation, an attorney will be glad to sit down with you and answer your questions.

Keywords: LLC, business formation, new rules, default rules, considerations,