Legal Risk Management Tips

In Part 1 of our Considerations for Forming and Operating a California LLC series, we discussed the entity structure of an LLC and initial considerations that should be taken including jurisdiction, the operating agreement and default rules including new rules for formation, duties owed by members, members’ authority, ownership interests and indemnification. In Part 2 we will explore tax treatment, other entities, raising capital, and staying compliant.

The first step in the process of any new business is deciding which entity structure the new company will utilize.  However, this process is also riddled with possible pitfalls.  Taking the time to understand the pros and cons of any entity structure is vital to the short and long-term success of the company.  In this two-part series, we will focus on one such business entity type – the Limited Liability Company (“LLC”), and will describe the entity structure, governing rules in the State of California and some common pitfalls to avoid when registering and operating your company as an LLC.

Limited liability companies, or LLCs, are a commonly used form of business entity.  LLCs are entities created pursuant to state law that allow their owners to mix and match characteristics of corporations, limited partnerships, general partnerships and, in the case of single-member LLCs, sole proprietorships.  These flexible entities combine the pass-through taxation of a partnership[1] with the limited liability of a corporation.  Since the first limited liability company act was enacted in Wyoming in 1977, all 50 states have limited liability company statutes on the books, and the use of LLCs in certain business settings has become ubiquitous.