What Is an LLC?

The California LLC law includes any regulation around forming a limited liability company (LLC) in the state of California. This type of business includes members who own the company and have limited liability on a personal level for any court judgments or debts against the company. A limited liability company can provide tax benefits to its members, such as allowing a member to report losses and profits of the LLC on a personal tax return. The California Corporations Code includes laws that govern all LLCs operating within the state.

Laws on Formation

An LLC in California can include one member or more than one member, which is the same regulation that exists in all states. When the members of an LLC file the Articles of Organization with the Secretary of State in California, the LLC is legally formed. LLC laws in California also mandate that every LLC in the state must have an operating agreement in effect. The law also requires that a notification is sent to all LLC members, informing them of the annual franchise tax that is imposed on the LLC.

What Is an Operating Agreement? 

An LLC's operating agreement includes details about the operations of the company and how it will be run. It serves as a contract among all members.

The operating agreement could include details about:

  • How losses and profits are shared
  • How the LLC plans to add any new members
  • How the LLC will be managed

Naming Laws

Any LLC operating in California must have a business name that includes the words limited liability company or one of the accepted abbreviations (LLC or L.L.C.). The name must be unique and can't be too similar to or exactly the same as another business currently registered with the state of California. Laws restrict LLC members from forming companies with names that could mislead people about the LLC's purpose.

For example, an LLC cannot use specific works in its name. These words include:

  • Corporation
  • Bank
  • Trust
  • Insurance company 

Laws on Record-Keeping

LLCs are also required to maintain specific records for as long as they remain in business.

Some of these records include:

  • A copy of the articles of organization
  • Member name(s) and address(es)
  • A copy of the operating agreement
  • Accounting documents with all financial contributions from every member
  • A copy of the business tax documents
  • At least six years of financial statements 

A registered agent is another requirement for every LLC operating in California. This registered agent must reside in California and receive authorization from the members of the LLC to receive court and legal documents on behalf of the company. Another recordkeeping law in California requires an LLC to file an annual statement. The statement should include the name of the LLC, along with its operating status, member name(s) and address(es), and the name of the registered agent.

LLC Liability

If the company has any obligations, debts, or court judgments, the members of the LLC will not be held personally responsible or liable for those amounts, just because they are members. However, if an LLC member holds financial control of a company and their personal finances are not separate from the finances of the business, that member could be held personally responsible for court judgments and debts against the business. This situation is referred to as alter-ego liability. If an LLC member chooses to personally underwrite any obligation or debt, they could also be held personally liable for these amounts.

All LLCs operating in California must hold sufficient insurance coverage, which includes insurance against liability. The amount that is sufficient depends on the type of business and industry.

Revised Uniform Limited Liability Company Act

On Jan. 1, 2014, a new law regarding LLCs went into effect in California. The law applies to newly formed LLCs, as well as those that are already registered in the state. This LLC law, called the California Revised Uniform Limited Liability Company Act (RULLCA), replaces an existing law that had been in effect since 1994. Any actions taken by the members or managers of an LLC after Jan. 1, 2014, are now governed by RULLCA. 

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