BUSINESS ENTITIES – Part 4: Limited Liability Companies by BPE Attorneys Keith Dunnagan and Matthew Kirkpatrick
In the last article we discussed corporations and their role in the business community. In this article we will look at the limited liability company model as an alternative business structure for your business. LLCs are governed by the California Corporations Code and within the LLC structure there are two types of tax structures and two types of management structures.
LLCs are the business hybrid of a partnership and a corporation. The LLC allows for the partnership management and profit distribution style coupled with the corporate third party liability protection. Because the LLC can look like either a corporation or a partnership, the LLC can elect to be taxed like a partnership or like a corporation. Again, like the S-Corp election above, most LLC members elect to have the LLC taxed like a partnership.
From a governance standpoint the LLC can act either like a partnership or a corporation. In forming an LLC and preparing the operating agreement the members of the LLC have to decide whether the company will be managed by the members or by a manager. Having a member managed LLC is much like a partnership in that each member has the authority to make decisions for the company in the ordinary course and scope of the business to extent that permission is granted in the operating agreement. Conversely, in a manager managed LLC, the manager is vested with much of the same authority as CEO of a corporation would have and that manager would be responsible for the day to day affairs of the company.
While there is no legal requirement for LLCs to maintain annual minutes of the members for the company, best practices for an LLC is to annually prepare minutes and to prepare special meeting minutes as required by the operating agreement. This action is evidence that the company is acting like a company to maintain the third party liability protection and avoid a potential piercing of the corporate shield argument in any future action.
While the flexibility of operating an LLC with the informality of a partnership is enticing, best practices suggests that the LLC should be operate with the formality of a corporation for the express purpose of maintaining the corporate third party liability protection.
The one draw back of an LLC is that the structure is relatively new in comparison to the partnership and corporate structure. The LLC model has effectively been around for less than 30 years and the breadth of case law simply does not exist. Additionally, because the operating agreement is more akin to a partnership agreement in structure and complexity, the LLC can at times be more expensive to form.
The key to a successful LLC really comes down to operating as a LLC and maintaining the books and selecting the right members or managers for the company. In doing so, the members should enjoy the protections and benefits afforded by the LLC structure for years to come.
If you are contemplating an LLC business model, the attorneys at BPE Law have significant experience in counseling business owners on LLC formation and governance. We would welcome the opportunity to assist you in your business endeavors and selecting your structure is your first step.
If you have any further questions, please feel free to contact me at firstname.lastname@example.org or, if you need help now, please call our office at (916) 966-2260 to set up a consultation.
This article is not intended to be legal advice, and should not be taken as legal advice. Every case requires review of specific facts and history, and a formal agreement for service. Please feel free to contact us if you need legal advice and are interested in seeing if we can help you.