LLCs & Corporations

California LLC or California Corporation?

Question:  Should I form a California LLC or a California corporation?

Answer:  The California limited liability company is usually a better entity than the California corporation or limited partnership.  The LLC is a hybrid of the corporation and the limited partnership.  Years ago some lawyers who understood that the corporation and the LP each had some bad characteristics created a new type of entity that took only the best characteristics of the corporation and LP and added those characteristics into the new type of entity called the limited liability company.

The California LLC has fewer formalities than the California corporation.  For example, California corporations must hold annual meetings of shareholders and and directors and the meetings should be documented with minutes.  California LLC law does not require the members or managers of a California LLC to have annual meetings.

If somebody says you should not form a California LLC because California LLCs pay more California state taxes that California LLCs disregard that statement.  Yes, there can be a difference is California state taxes paid by an entity taxed as a corporation vs. an entity taxed as a sole proprietorship or a partnership.  A California LLC can be taxed one of the following four ways for federal income tax purposes:

  • a sole proprietorship if the LLC has one owner or two owners who own their interests in the LLC as community property.
  • a partnership if the LLC has more than one owner.
  • a C corporation.
  • an S corporation if it satisfies all eligibility  requirements.

Thus, if the amount of income your entity will generate is a California state tax issue, then you can have your California LLC taxed as a C corporation or an S corporation (if eligible) to get California corporate tax treatment or as a sole proprietorship or partnership to get non-corporate California state tax treatment.

By | 2015-02-19T22:17:33+00:00 October 6th, 2014|Categories: CA LLC Formation, FAQs, LLCs & Corporations|0 Comments

Administrative Dissolution for Failing to File a Statement of Information

Administrative dissolution of an LLC occurs when an LLC fails to follow the state’s requirements, resulting in the state agency penalizing or dissolving the LLC.  In California, these requirements include payment of the annual tax and fee, in addition to filing the initial and biennial Statement of Information.  When an administrative dissolution occurs, the LLC must act in a timely manner to correct the deficiency.

There are many instances when an LLC is administratively dissolved, yet it continues to operate.  This often occurs when the LLC is not aware of the administrative dissolution.  An issue then arises as to who is liable for acts when an administratively dissolved LLC enters into a contract and subsequently is unable to pay or perform.  This issue was dealt with in Pannell v. Shannon, when a single-member Kentucky LLC was dissolved, but continued to enter into a lease agreement.  When the dissolved LLC defaulted on the lease, the other party sued not only the dissolved LLC, but also the single member.  The LLC responded by immediately taking steps for reinstatement, which was granted by the Kentucky Secretary of State.  Still, the issue remained whether or not the single member was personally liable.

The Supreme Court of Kentucky affirmed the lower courts’ decision in holding that the member was not personally liable for the administratively dissolved LLC’s lease.  By relying on the Kentucky LLC Act, the court determined that since the reinstatement related back to the date of the dissolution,  the LLC was essentially never dissolved in the first place.  The court emphasized the absurdity of limiting an unintentionally dissolved LLC to only winding-up activities.  This limit on activities, if taken literally, would prevent the LLC from filing the necessary paperwork to be reinstated.  Also, the court highlighted the purpose of the LLC Act: to limit personal liability.  A missed LLC fee or tax payment does not justify disregarding the most important principle behind why people form LLCs.

The opinion reveals that despite a complicated scenario, an understanding of the basic reason behind a limited liability company is not to be ignored: An LLC is meant to protect owners and members from personal liability.  The opinion also shows that the normal requirements for a winding-up LLC do not apply for LLCs which are unintentionally dissolved.  By protecting managers and remembering the purpose of an LLC, this ruling should be regarded as a victory.

 

 

 

By | 2016-12-13T21:20:14+00:00 September 25th, 2014|Categories: Lawsuits, LLCs & Corporations, Miscellaneous, Operating LLCs|0 Comments

RULLCA Continues to Gain Momentum

On April 11th, Minnesota signed into law the “New Act,” replacing the Minnesota Limited Liability Company Act.  This New Act was largely based the Revised Uniform Limited Liability Company Act (RULLCA) provided by the National Conference of Commissioners on Uniform State Laws (NCCUSL).  By passing the New Act, many of the default rules which governed Minnesota LLCs were modified or changed completely.  These changes are to take place on August 1, 2015, but do not affect LLCs formed prior to that date, unless the LLC requests otherwise.  For access to the entire text of the New Act, visit the Minnesota State Legislature’s website.

With Minnesota’s enactment, RULLCA has now been adopted in 9 states (including California) and the District of Columbia.  Additionally, South Carolina introduced their version of RULLCA this year.  When first passed in 2006, RULLCA was criticized for having awkward phrasing, in addition to creating uncertainty regarding fiduciary duties and remedies.  However, after  a slow start, RULLCA seems to be picking up steam.  In the past two years, four states have enacted RULLCA, and other states, like South Carolina, may not be far behind.

For information on California’s Revised Uniform Limited Liability Company Act, click here.  The article provides access to all provisions of California’s version of RULLCA.

By | 2015-05-21T20:30:29+00:00 May 16th, 2014|Categories: LLCs & Corporations, Miscellaneous|0 Comments

Arkansas Rules that Member v Member Claims Are Direct

When one member of a limited liability company has a claim against another member or a manager of the limited liability company (LLC), it can be classified as direct or derivative.  A direct claim is one where the individual member is negatively affected by an action of the LLC, but the whole LLC is not injured.  A derivative suit is one in which the entire LLC is affected by a decision of one of it’s managers or members.  In these derivative cases, a member usually brings suit on behalf of the LLC.  Determining the classification is important, because it reveals how the procedure of the claim will be handled

For the LLC, a derivative suit is preferable because there are many opportunities in the procedure which allow for the claim to be dismissed.  However, the plaintiff (LLC member) would rather the claim be direct, so they can avoid procedural obstacles and take have their claim proceed much easier.  For more detail, including implications of both cases, see direct and derivative suits.

Though the differences between direct and derivative claims may be clear, which category the claim falls under might be difficult to discern.  This is especially true for LLCs, because they do not have a long history of these types of cases.  The Arkansas Supreme Court dealt with this issue in Muccio v. Hunt.  Here, minority members of an LLC sued the other members and managers.  They alleged that these majority members committed fraud, breached their duty to disclose information, and converted their membership interests.

The trial court found that the claim was derivative.  This meant that the minority members of the LLC had no standing because the LLC itself was the proper party to bring this complaint.  However, the Supreme Court of Arkansas reversed, holding that the claim may proceed in the members’ names, stating that the members themselves were injured; and therefore, the claim was direct.  The court addressed the fraud, breach of duty to disclose, and conversion separately.

Regarding fraud, the court first noted these types of suits are normally derivative.  The  court noted that direct suits are appropriate, however, when the member shows an injury that is unique to the member, and not applicable only to the LLC.  In applying this rule to the present situation, the court found that the minority members suffered loss of their ownership.  The court further noted that the fraud being alleged by plaintiffs was not fraud that harmed only the LLC.  This resulted in the claim of fraud to be classified as direct, not derivative.

When analyzing the duty to disclose, the Arkansas Supreme Court noted their LLC statute.  This requires the LLC managing members to make available full and true information that reasonably affects any member.  The court later stated that these statutory rights of members supported individual claims, not claims made by the LLC.  This led the court to rule that this claim was also direct.

Finally, the court addressed the claim of conversion (wrongful possession of another person’s property).  In this case, the plaintiffs contended that the LLC converted the minority member’s interests.  In their complaint, the plaintiffs stated the the managing members did this through fraudulent misrepresentation.  The court agreed that the conversion was tied to the fraud; since the fraud claim was direct, then the conversion claim was also direct.

Throughout the opinion, the Arkansas Supreme Court constantly compared LLC and corporate law.  The court even mentioned corporate case law and applied it to the LLC case at hand. This was a surprise to many, and appeared to blur the line between the two business entities.  By ruling that these types of claims were direct, the Arkansas Supreme Court made it easier for a disgruntled LLC member to bring a suit against the other members.  If this type of ruling becomes a trend for other states, it means that the LLC may have to take more steps to protect themselves from liability.

 

 

By | 2016-12-13T21:20:15+00:00 April 18th, 2014|Categories: Lawsuits, LLCs & Corporations, Member Disputes|0 Comments

Can a California LLC Have Officers Such as a President?

Question: Can an California limited liability company have a President, Vice President, Chief Executive Officer or personnel with other titles?

Answer: Yes. California Revised Uniform Limited Liability Company Act Section 17704-07(v) provides that California LLCs can have officers such as a President, Vice President, Secretary, Treasurer, CEO or CFO if officers are authorized in the LLC’s Operating Agreement.  If there is no Operating Agreement or the Operating Agreement is silent as to officers and the LLC is manager managed, the managers can appoint officers.

California Revised Uniform Limited Liability Company Act Section 17704-07(w) states that a contract signed by a California LLC’s President, Vice President, Secretary, Treasurer, chair person of the Board or Chief Financial Officer is not invalid unless the act is prohibited in the LLC’s Articles of Organization or the other party to the contract knows the LLC’s officer does not have the authority to sign the contract.

If your LLC will have people serve as President or CEO the LLC’s Operating Agreement should contain provisions that create the positions, give names to the positions and describe the duties associated with the position.  FYI:  Our custom Operating Agreement gives you the option to add one or more positions such as President and have appropriate language inserted into the Operating Agreement.

Caution:  If you or your company will enter into a contract with a California LLC you should always ask the LLC to give you a copy of resolutions signed by all the members of the LLC (or the minimum number of members necessary to approve the contract) that authorizes the LLC to enter into the contract.  The resolutions should always specify the name and title of the person who will sign the contract for the LLC.  If the members of World Wide Widgets, LLC, give a copy of such a resolution to you then you will know that Homer Simpson, as President of the LLC, as the power to sign the contract on behalf of the LLC.

See “President of Corporation Personally Liable for Signing Contract.”

By | 2016-12-13T21:20:16+00:00 February 9th, 2014|Categories: FAQs, LLCs & Corporations, Operating LLCs|0 Comments

President of Corporation Personally Liable for Signing Contract

Improperly Worded Company Contracts can Cause Signer to be Liable

One of the primary reasons people form limited liability companies and corporations is to protect the owners from the debts and liabilities of the company. The general rule of California law is that the members of a California LLC and the shareholders of a California corporation are not liable for the company’s debts. One of the biggest exceptions to this rule arises when an owner signs a contract and becomes personally obligated to pay the company’s debt.

The Personal Guaranty

The most common type of contract that obligates an owner of a company to pay the company’s debts is called a “guaranty” or “personal guaranty.” A guaranty is a contract by which the signer/guarantor promises to pay or satisfy the debt of another person (the company). Guaranties are frequently required by landlords and lenders who know that if the company doesn’t pay, the debt will never be paid.

Contracts that Create Personal Liability

Owners and employees of a company can create contractual personal liability for themselves if they sign a contract on behalf of the company, but the wording of the contract does not make it clear that the signer is signing on behalf of a company.

If the signer of an LLC or corporate contract wants to avoid becoming personally liable for the debts of the company created in the contract, the language in the contract must clearly state that the party is the LLC or corporation and indicate the capacity of the signer.

Iowa limited liability company and corporate attorney Marc Ward reports on a recent Iowa case that where the court found that the person who signed a two page contract on behalf of a corporation was personally liable to pay the corporation’s debt under the contract.

The Iowa Court of Appeals opinion in Builders Kitchen and Supply Co. v. Moyer, N0. 0-655/09-0194 (September 2, 2009) is a deceptively simple case. On the one hand it represents the folly of not having even run of the mill contracts reviewed by lawyers before they are signed. And on the other hand, it is a warning to lawyers that things aren’t as simple as they appear.

Unfortunately for Moyer the contract contained a clause that said “I hereby personally guarantee to pay on demand any and all sums due that my/our company shall fail to pay.”

Mr. Moyer did not sign the signature block for the personal guaranty, but the court found he was liable anyway.

Proper Way to Sign Contracts

Right Way to Designate the Company in a Contract:

World Wide Widgets, LLC, a California limited liability company.

Note the LLC after the name and the written out “limited liability company.” Make sure both the abbreviation and the full designation are used. Typically the proper designation of the company should be in the first paragraph and in the actual signature block where the signer signs. If it is not, the signer should hand write the missing information above where he or she signs and/or on the first paragraph where the company is named.

Right Way to Designate the Capacity of a Signer in a Contract:

Homer Simpson, President (for a California corporation), or Homer Simpson, Manager (for a manager-managed California LLC), or Homer Simpson, member (for a member-managed California LLC).

Wrong Way to Designate the Company in a Contract:

World Wide Widgets

Wrong Way to Designate the Capacity of a Signer in a Contract:

Homer Simpson.

Beware of Personal Guaranty Language in the Contract

If a contract contains any language that would cause the signer to be a guarantor and impose personal liability on the signer, the signer who wants to avoid personal liability must take a pen and cross-out or strike-out all of the guaranty language. If you are signing a contract, you must read it and strike-out any language you don’t want and write on the document any additional language you want. You can modify with hand-written changes all pre-printed contracts before signing.

By | 2017-10-05T10:36:19+00:00 January 1st, 2014|Categories: Asset Protection, LLCs & Corporations, Operating LLCs|0 Comments