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So far Richard C. Keyt has created 47 blog entries.

How Do I Open a Bank Account for My New California LLC?

Question:  I just formed a new California limited liability company.  How do I open a bank account in the name of the LLC.

Answer: You need two a minimum of items to open a bank account in the name of your new California LLC.  Give the following to the bank:

  • Required:  Copy of the Articles of Organization approved by the California Secretary of State.
  • Required:  Give the bank the LLC’s federal employer identification number (the “EIN”).  If you do not have an EIN for the LLC and your LLC is taxed as a disregarded entity (a single member LLC) and it does not have any employees you can give the bank your social security number.
  • Optional:  Some banks require a copy of the an Operating Agreement signed by all of the members of the LLC.
By |2016-07-03T16:28:02+00:00July 3rd, 2016|Categories: CA LLC Formation, FAQs, How Do I|0 Comments

How to Dissolve a California LLC

Question:  I am a member of a California LLC.  What are the legal requirements to dissolve the LLC?

Answer:  California’s Revised Uniform Limited Liability Company Act (RULLCA) provides four ways to dissolve or terminate a California limited liability company.  The four methods are:

  • The LLC’s Articles of Organization contains a provision that says the LLC must dissolve on the occurrence of one or more events set forth in the Articles of Organization.  Few California LLCs have Articles of Organization that contain this type of provision.
  • The members signed an Operating Agreement that contains a provision that says the LLC must dissolve on the occurrence of one or more events set forth in the Operating Agreement.  Many California LLCs have Operating Agreements that contain dissolution provisions.  For example, if the Operating Agreement says that the LLC will dissolve on the sale of its real property and the LLC sells its real property then the LLC must dissolve.  Cal. Corp. Code Section 17707.01(a).
  • If the LLC ceases to have a member the LLC for 90 consecutive days it must dissolve.  This happens frequently to California single member LLCs when the member is a person and that person dies.  Cal. Corp. Code Section 17707.01(c).  Automatic dissolution can create a nightmare for the heirs of the deceased.  For example, if a single member California LLC owns valuable real estate and the member dies and no member replaces the deceased member within 90 days of the death, the LLC ceases to exist and there is no owner of the real estate.  Solution: One of the reasons we recommend that people own their membership interests in California LLCs through a trust is to prevent the dissolution of the LLC if the single member dies.
  • The last method to terminate a California LLC occurs if a majority of the LLC’s members vote to dissolve the LLC.  Cal. Corp. Code Section 17707.01(b).  If the Operating Agreement requires more than a  majority vote of the members to approve a dissolution then that requirement must be met to dissolve the LLC.

How to Legally Dissolve the California Limited Liability Company

If the necessary number of members of a California LLC vote to dissolve the LLC the member(s) actually dissolve the company by doing the following:

  • The LLC must file a final current year tax return with the California Franchise Tax Board.  Check the applicable Final Return box on the first page of the return, and write “final” across the top.  The LLC must not conduct business in California after its final taxable year.  For more on this topic read the FTB Publication 1038, Guide to Dissolve, Surrender, or Cancel a Business Entity.
  • After filing the final tax return with the FTB, the members must file the California Secretary of State form called Certificate of Dissolution (Form LLC-3) to dissolve (i.e., elect to wind up) a California LLC.  To complete the cancellation process, the LLC members must also file a Certificate of Cancellation (Form LLC-4/7)Note: Form LLC-3 is not required when the vote to dissolve was made by all of the members and that fact is noted on a Certificate of Cancellation (Form LLC-4/7) filed by the members with the California Secretary of State.  Note: If the vote to dissolve was not made by all of the members, a Certificate of Dissolution (Form LLC-3) must be filed prior to or together with Form LLC-4/7.
By |2016-12-13T21:20:06+00:00June 30th, 2016|Categories: CA Law, FAQs, How Do I, Operating Agreements, Operating LLCs|0 Comments

How Do I Prove I am a Member of a California LLC?

Question:  Last year my friend and I formed a California limited liability company by filing Articles of Organization with the California Secretary of State.  He opened a bank account on which he is the sole signer.  Although both of us have been providing services on behalf of the LLC my “friend” now says that he owns 100% of the LLC.  How do I prove I own 50% of the LLC?

Answer:  Unfortunately your problem is one we hear about a lot.  It is a problem that can easily be avoided if all the members of a newly formed LLC would sign an Operating Agreement immediately after forming the LLC.  One of primary reasons to sign an Operating Agreement is because it identifies all the members and states the percentage of the LLC owned by each member.  The lack of a good Operating Agreement leads to member disputes and conflict.

The Articles of Organization of a California limited liability company does not contain the names of the members (owners) of the LLC so it is not helpful.  However, California law requires that the members of a newly formed California LLC file a Statement of Information with the California Secretary of State within 90 days of the date the LLC was formed.  If you or your friend filed this document it would be evidence that you are a member of the LLC.  Read “California LLC Statement of Information.”

If your LLC filed a partnership tax return or an S corporation tax return the names and percentage ownership of the LLC should be set forth in the tax return.  If you friend filed the tax return and didn’t give you a copy of the return your friend may not give you a copy of it now.

If you can’t resolve the situation your only recourse may be to file a lawsuit and ask the court to find that you are a member of the LLC.

By |2016-07-03T16:52:53+00:00April 3rd, 2016|Categories: CA LLC Formation, FAQs, How Do I, Member Disputes, Members|0 Comments

Problem if Sole Member is Not the Organizer of a CA LLC

Question:  I am to be the sole member of a new California limited liability company, but I did not sign the Articles of Organization as the organizer of the LLC.  Is that a problem?

Answer:  Maybe!  California Corporations Code Section Section 17704.01(a) states:

If a limited liability company is to have only one member upon formation, the person becomes a member as agreed by that person and the organizer of the limited liability company.

If the organizer of a single member LLC is the sole member then everything is good.  However, if the would be sole member of a single member California LLC (the “Prospective Member”) is not the organizer who signed the Articles of Organization filed with the California Secretary of State then:

  • The Prospective Member will never be a member of the LLC unless and until the Prospective Member and the organizer agree that the Prospective Member is the sole member.  The agreement should include the date the Prospective Member becomes a member and any conditions required by the organizer.
  • How does the sole member prove that the organizer agreed that he/she/it could be the member?
  • A prudent Prospective Member will obtain a written statement signed by the organizer that states that the Prospective Member is the sole member of the LLC as of a specified date.  Recommendation:  The Prospective Member must get a written statement from the organizer.  If the Prospective Member does not obtain a written statement from the organizer, how can the Prospective Member prove he/she/it is the sole member if challenged in court?

Warning to Entities and Trusts:  When a California LLC is to be owned by a sole member that is an LLC, corporation, partnership or trust most of the time the organizer is a person rather than the sole member.  To avoid the California Corporations Code Section Section 17704.01(a) problem the sole member should be the organizer that signs the Articles of Organization.  The California Secretary of State says:

  • If Form LLC-1 is signed by an entity, the person who signs on behalf of the entity should note their name and position/title and the entity name. Example: If a limited liability company (“Smith LLC”) is the organizer, the signature of the person signing on behalf of the Smith LLC should be reflected as Joe Smith, Manager of Smith LLC, Organizer.
  • If Form LLC-1 is signed by a trust, the trustee should sign as follows: ___________, trustee for ___________ trust (including the date of the trust, if applicable). Example: Mary Todd, trustee of the Lincoln Family Trust (U/T 5-1-94).

Practice Pointer:  If the organizer is not the Prospective Member the best way to solve this problem is to: (i) have a statement at the end of the LLC’s Operating Agreement that says the organizer authorizes the Prospective Member to be the sole member of the LLC as of the date the Articles of Organization were filed with the California Secretary of State, and (ii) have the organizer sign the Operating Agreement immediately under the statement.  This is something we do routinely when we know that the sole member was not the organizer.

By |2016-12-13T21:20:06+00:00August 2nd, 2015|Categories: CA LLC Formation, FAQs, Members|0 Comments

California Court of Appeal Rules RULLCA Does Not Apply to LLC Lawsuit Filed before 1/1/14

The California Court of Appeal held in Kennedy v Kennedy, 235 CA4th 1474 (2015), that the California Revised Uniform Limited Liability Company Act (RULLCA) did not apply to a dispute among members of a California limited liability company because their lawsuit was filed before January 1, 2014, the RULLCA effective date.  The court based its ruling on California Corporations Code Section 17713.03 which states,

This title does not affect an action commenced, proceeding brought, or right accrued or accruing before this title takes effect.

The defendants argued that RULLCA applied because they wanted to be able to use the mandatory disgruntled member buy-out scheme set forth in Corporations Code Section 17707.03(c)(1) which states:

In any suit for judicial dissolution, the other members may avoid the dissolution of the limited liability company by purchasing for cash the membership interests owned by the members so initiating the proceeding, the “moving parties,” at their fair market value.

Subsections (c)(2) – (6) set forth a procedure for consummating the buy out.  Subsection (c)(6) states,

A dismissal of any suit for judicial dissolution by a manager, member, or members shall not affect the other members’ rights to avoid dissolution pursuant to this section.

The defendants wanted RULLCA to apply so they could carry out a buy out under Section 17707.03(c) despite the fact the plaintiff had dismissed the claim for judicial dissolution.  There is no mandatory buy out under California’s LLC law before January 1, 2014.

By |2016-12-13T21:20:06+00:00July 3rd, 2015|Categories: CA Law, CA LLC Statutes, Lawsuits, Member Disputes|0 Comments

New Member of a California LLC Bound by Operating Agreement

Question:  The initial members of my California LLC signed an Operating Agreement.  One of the initial members assigned ten percent of the membership interests to John Doe.  The initial members agreed to admit John as a member.  John refuses to sign the Operating Agreement.  What can we do?

Answer:  The good news for the initial members who signed the Operating Agreement is that Section 17701.11(b) states “A person that becomes a member of a limited liability company is deemed to assent to the operating agreement.”  John Doe is legally bound by the obligations contained in the Operating Agreement despite the fact he never signed it.

Warning to Prospective Members of an Existing California Limited Liability Company:  If you are thinking of becoming a member of an existing California LLC that has an Operating Agreement, do not become a member until you review the LLC’s Operating Agreement and approve all of its provisions.

By |2016-12-13T21:20:06+00:00May 10th, 2015|Categories: CA LLC Statutes, FAQs, Operating Agreements, Operating LLCs|0 Comments

California LLC Allocation of Profits

Question:  My friend and I started a California LLC.  We never signed an Operating Agreement.  I assumed that we would share the profits equally, but my friend says that he gets 60% of the profits and I get 40%.  This dispute has ruined our business relationship.  What should I do?

Answer:  Your dispute is too common.  Unfortunately the toothpaste is out of the tube, and it may be too late to solve the huge problem created by the members failure to sign an Operating Agreement that states how profits and losses will be allocated among the members.  The California Revised Uniform Limited Liability Act does not specify how profits and losses will be allocated among members of a multi-member California LLC.

Members of a California limited liability company must agree in an oral agreement or in a written and signed Operating Agreement as to how profits and losses will be allocated among the members.  The problem with an oral agreement is that it is a recipe for disaster because when people disagree they have no way to prove what they previously agreed to.

One of the main reasons all of the members of a multi-member California LLC need to sign an Operating Agreement is so they have proof in the document as to how the profits and losses are allocated among the members.

By |2015-05-09T10:34:06+00:00May 9th, 2015|Categories: FAQs, Member Disputes, Operating Agreements, Operating LLCs|0 Comments

Sending Copies of LLC Tax Returns to Members of a California LLC

Question:  I am a member of a California LLC, am I entitled to get a copy of my LLC’s federal income tax return?

Answer:  It depends.  If the LLC has 35 or fewer members California Corporations Code Section 17704.10(e) requires that all members be given copies of the LLC’s federal, state and local income tax return for the year.  Section 17704.10(e) states:

The limited liability company shall send or cause information to be sent in writing to each member or holder of a transferable interest within 90 days after the end of each taxable year the information necessary to complete federal and state income tax or information returns and, in the case of a limited liability company with 35 or fewer members, a copy of the limited liability company’s federal, state, and local income tax or information returns for the year.

By |2016-12-13T21:20:06+00:00May 3rd, 2015|Categories: CA Law, CA LLC Statutes, FAQs, Operating LLCs, Tax Issues|0 Comments

Disassociation of a Member of a California LLC

Question:  Can a member of a California LLC disassociate (withdraw or terminate membership) from the LLC at any time even if disassociation is prohibited by an Operating Agreement?

Answer: Yes.  A good Operating Agreement will contain provisions that prevent a member from dissociating or that allow a member to disassociate only on the occurrence of one or more conditions.  See California Corporations Code Sections 17706.01(b)(1) and 17706.02(b).  However, even if a member is prohibited from disassociating the member may quit (disassociate) at any time by notifying the other members of the disassociation.

If the disassociation is prohibited by the LLC’s Operating Agreement, the disassociating member may be liable to the LLC for damages.  California Corporations Code Sections 17706.01(c). The disassociating member will not be entitled to any money or property unless the Operating Agreement provides otherwise.  California Corporations Code Section 17704.04(b).

By |2016-12-13T21:20:06+00:00May 2nd, 2015|Categories: FAQs, Operating Agreements, Operating LLCs|0 Comments

Don’t Use a PO Box for LLC’s Designated Office

Question:  Line 3.a of the California Secretary of State’s Articles of Organization, Form LLC-1, requires the initial street address of the LLC’s designated office in California.  Can the designated office be a U.S. post office box?

Answer:  No.  If the LLC’s designated office in California is a U.S. post office box the California Secretary of State will reject the Articles of Organization.  If the LLC’s mailing address is different from the address of the LLC’s designated office in California it is ok to enter a U.S. post office box on line 3.b of the Articles of Organization, Form LLC-1 for the LLC’s mailing address.

By |2015-04-29T22:19:58+00:00April 29th, 2015|Categories: Articles of Organization, FAQs, Formation Issues|0 Comments

What’s a California Franchise Tax Board Form 3832?

Question:  My California LLC generates income from its business inside California.  One of the members is a nonresident of California and another member is a company formed in a state other than California.  I heard that my California LLC must file a California Franchise Tax Board Form 3832.  Is that true and if if so, what is the Form 3832?

Answer:  If your California limited liability company is taxed as a partnership for U.S. income tax purposes then it must file an FBT Form 3832 with the California Franchise Tax Board when it files its first FBT Form 568. The completed FTB Form 3832 must contain the following:

  • The names and social security numbers (SSNs), individual taxpayer identification numbers (ITINs), or federal employer identification numbers (FEINs) of all members that are people who are not residents of California and companies that are not formed in California.
  • The signature of each nonresident member evidencing member’s consent to the jurisdiction of the State of California to tax that member’s distributive share of income attributable to California sources. If the nonresident member has a spouse or registered domestic partner (RDP), the spouse / RDP must also sign the Form FTB 3832.
Anytime an existing California LLC acquires a member that is not a resident of California the LLC must obtain the nonresident’s consent and consent of the nonresident’s spouse or RDP if the nonresident is married and file the FTB Form 3832 with the LLC’s tax return for the year in which the nonresident acquired his/her/its membership interest.
Note:  By signing and submitting the FTB Form 3832 to the California Franchise Tax Board, the nonresident member is alerting the FBT that it should expect the nonresident member to file an annual California income tax return and pay tax on all income earned by the LLC from inside California.
Warning:  If a member fails to sign form FTB 3832, the LLC must pay tax on the member’s distributive share of income at that member’s highest marginal rate.  Any amount paid by the LLC will be considered a payment made by the member.
By |2016-12-13T21:20:13+00:00April 12th, 2015|Categories: FAQs, Franchise Tax Board, Tax Issues|0 Comments

How Do I Acquire an Ownership Interest in a California LLC as Separate Property?

Question:    I am married and live in California.  I intend to form a single member California LLC.  I know that California community property law my spouse will automatically own  one half of my interest in the LLC.  How do I acquire my LLC interest as my separate property?

Answer:  California residents who are married or who are domestic partners own assets one of two ways: (1) as community property or (2) as separate property.  Community property ownership means each spouse or partner owns an undivided one half of the total interest in the asset.  Separate property ownership means that one person owns 100% of the property and the other person does not own any interest in the property.  Because California law provides that all property acquired by one spouse or partner is automatically community property unless it comes from a gift or an inheritance both California residents will own the new LLC membership interest as community property unless the non-owner signs a document in which he or she disclaims any ownership interest in the LLC.

When we form a California LLC and the one of the members tells us that he or she is to own the membership interest as separate property we prepare a document called a “Disclaimer of Interest” for the non-owner to sign.  When signed the non-owner acknowledges that he or she does have have any ownership interest in the LLC membership interest.

By |2016-12-13T21:20:13+00:00April 7th, 2015|Categories: FAQs, Formation Issues, How Do I|0 Comments

California LLC Member’s Liability for Capital Contribution

Question:  A California LLC owes me money, but claims it is broke.  One of the members of the California LLC signed an Operating Agreement in which he promised to contribute $50,000 to the LLC.  The member never paid the money to the LLC.  Can I collect my debt from the member, but you may have to sue the member and the LLC in the same lawsuit?

Answer:  Yes.  California law provides that a member who makes a promise in writing to make a capital contribution is liable to a creditor of the LLC if the member fails to contribute the money to the LLC.  California Corporations Code Section 17704.03(c) states:

“A creditor of a limited liability company that extends credit or otherwise acts in reliance on an obligation described in subdivision (a) may enforce the obligation.”

By |2015-05-02T11:18:33+00:00March 25th, 2015|Categories: FAQs, Lawsuits, Operating Agreements|0 Comments

California Agent for Service of Process

Every new limited liability company formed in California and every LLC formed outside California that intends to register to do business in California must appoint an agent for service of process, aka resident agent.  New LLCs must designate the agent for service of process in the Articles of Organization, Form LLC-1.

The agent for service of process can be a person or a corporation that has complied with Corp C §17701.13(c).  Before a corporation (domestic or a foreign corporation registered to do business in California) can become an agent for service of process, it must file the certificate required by Corp C §1505 with the California Secretary of State. A general partnership, limited partnership and a limited liability partnership can never be an agent for service of process in Item 4 of Form LLC-1.

If a natural person is the agent for service of process the person must be a California resident.  Corp C §17701.139c). The person’s street address cannot be a post office box, but it can be a residence address or a business address.  The address should never include a c/o or “in care of” because the California Secretary of State will probably reject the Articles of Organization.

By |2016-12-13T21:20:13+00:00March 22nd, 2015|Categories: Articles of Organization, California Secretary of State, Formation Issues|0 Comments

Original Signature on Articles of Organization

Question:  When I file the Articles of Organization for my new LLC with the California Secretary of State will the Secretary of State accept Articles on which the organizer’s signature is a facsimile rather than an original signature?

Answer:  Yes, however, California law requires that the person who signs the Articles of Organization as the organizer retain the Articles of Organization with the original signature on it for five years.  See Corp C §17.1(d).  After it approves the Articles the Secretary of State will return the approved Articles with original signature to the company.  If it contains an original signature, then put the document in a safe place for the next five years.

By |2016-12-13T21:20:13+00:00March 18th, 2015|Categories: Articles of Organization, FAQs, Formation Issues|0 Comments

Manager Managed CA LLC Change to Member Managed

Question:  I formed a manager managed California limited liability company.  Can the members of the LLC change the form of management from manager managed to member managed by amending the Operating Agreement to state that the LLC is manager managed?

Answer:  No.  To change from manager managed to member managed, a California LLC must amend its Articles of Organization to provide in item 5 that the LLC will be managed by all of it members.  Of course the members should also modify the LLC’s Operating Agreement to provide for manager management.

To amend the Articles of Organization file Form LLC-5 with the California Secretary of State.

By |2015-04-30T00:26:21+00:00March 9th, 2015|Categories: Articles of Organization, FAQs, How Do I, Operating LLCs|0 Comments

Can a California LLC Have an Oral Operating Agreement?

Question:  My California LLC has three members who never signed an Operating Agreement.  The members agree from time to time as to certain terms and conditions applicable to the LLC such as what actions the manager can take without the approval of all of the members.  If the members of a California limited liability company agree on an oral Operating Agreement is it legally enforceable?

Yes:  California RULLCA Section 17701.02(s) states:

Operating agreement” means the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company, including a sole member.”

Caution:  As LLC attorneys who have formed 4,400+ LLCs my father and I have seen too many disputes among members who never signed an Operating Agreement and who cannot agree on LLC issues.  LLC members who don’t have a signed Operating Agreement and rely instead on oral agreements are “cruisin” for a “bruisin.”  Oral agreements result in he said she said disputes among members.  If the members resort to litigation to settle a dispute it is a roll of the dice as to who the jury will believe.

If your California LLC does not have an Operating Agreement signed by all of the members then do yourself and the other members a big favor and arrange for all the members to sign a good, custom Operating Agreement drafted to comply with California’s new Revised Uniform Limited Liability Company Act that took effect on January 1, 2014.

By |2015-02-25T20:03:50+00:00February 9th, 2015|Categories: FAQs, Formation Issues, Operating Agreements|0 Comments

Can People Agree on the Contents of an Operating Agreement before Forming an LLC?

Question:  I understand that California LLC law does not require my multi-member California LLC to have an Operating Agreement signed by all of the members.  However, I know that it is prudent that every California LLC have its members sign an Operating Agreement.  Several of us want to form a California LLC, but I am concerned that after we form the LLC we may not agree on the terms and conditions of the Operating Agreement.  Can the prospective members of a to-be-formed California LLC agree on the contents of an Operating Agreement before they actually file the Articles of Organization and form the LLC?

Answer:  Yes.  California RULLCA Section 17701.11(c) states:

“Two or more persons intending to become the initial members of a limited liability company may make an agreement providing that upon the formation of the limited liability company the agreement will become the operating agreement. “

I recommend that if you are considering forming a California LLC with multi-members that would involve a lot of money, services or members’ time, all of the prospective members should definitely sign a contract in which they agree that on forming the LLC each of them will sign the Operating Agreement that is attached as an exhibit to the contract.  The agreement to sign an Operating Agreement must be created as part of a legally binding contract.

Call me, California LLC attorney Richard C. Keyt, J.D., M.S. (accounting), at 844-552-6468 ext. 3 if you need a contract among prospective members to sign an Operating Agreement.

By |2016-12-13T21:20:14+00:00February 8th, 2015|Categories: FAQs, Formation Issues, Operating Agreements|0 Comments

Must a CA LLC Formed before 2014 Amend Its Articles of Organization?

Question:  My California limited liability company was formed before January 1, 2014, the date California’s new LLC act became effective.  Do I have to amend the LLC’s Articles of Organization filed with the California Secretary of State?

Answer:  If a manager managed California LLC was formed before 2014 and its Articles of Organization do not state that the LLC is managed by a sole manager or by more than one manager, the LLC must amend its Articles of Organization and specify the type of management.  California Revised Uniform Limited Liability Company Act Section 17702.01(b)(5) states “If the limited liability company is to be manager-managed, the articles of organization shall contain a statement to that effect.”

To amend your California LLC’s Articles of Organization file one of the following documents with the California Secretary of State:

Warning:  If you want your California LLC to be manager managed the Operating Agreement must also contain certain manager managed language.  Stated another way, a California LLC is member managed unless the following two conditions are satisfied:

  1. The Articles of Organization state the the LLC is manager managed, and
  2. The Operating Agreement contains the statutorily required manager managed language.

See California RULLCA Section 17704.07(a).

By |2015-02-16T17:13:07+00:00January 14th, 2015|Categories: Articles of Organization, CA LLC Formation, CA LLC Statutes, FAQs, Formation Issues|0 Comments