Limited Liability Companies (LLCs)

Limited Liability CompaniesThe business litigation lawyers at Mark Anchor Albert and Associates have an established track record of success in litigation claims involving Limited Liability Companies (“LLCs”).

An LLC is a form of business organization that is treated by governmental entities as a partnership for income tax purposes but is treated as a corporation for liability purposes. In California, LLCs are statutory entities formed under the Beverly-Killea Limited Liability Company Act of 1994 (Cal. Corp. Code §§ 17000-17655) (the “Act”) when articles of organization are filed with the California Secretary of State on the Secretary of State’s Form LLC-l. An LLC is defined at California Corporations Code section 17001(t) as an entity having one or more members that is organized under the Act.

Generally, one or more LLC “members” enters into an operating agreement either before or after the articles of organization are filed. See Cal. Corp. Code § 17050. The operating agreement may be oral or written and may consist simply of an agreement to form an LLC. See Cal. Corp. Code § 17001(a) & (b). An operating agreement typically covers, among other things, the members’ obligation to contribute capital; profit and loss allocations; distribution shares; management and voting rights; and buy-out and dissolution rights and procedures.

Limited liability partnerships and S corporations were the primary business structures used to achieve favorable tax treatment and limited liability for owners in commercial affairs until LLCs were authorized by statute. An LLC, if properly structured, can provide the advantages of a limited liability partnership (LLP) or an S corporation without various disadvantages inherent in those alternative business forms.

For example, while LLPs typically permit financial structuring flexibility, limited individual partner liability, and pass-through tax treatment, at least one person or entity—the general partner—typically remains fully liable for partnership obligations, and the limited partners cannot take part in the management of partnership business without risking the loss of their exclusion from personal liability for partnership losses. In contrast, no LLC member is required to be personally liable for the LLC’s losses, liabilities, and obligations, as each member is permitted to manage the company and to take part in the control of its business without losing the member’s limited liability. See Cal. Corp. Code §§ 17101, 17150.

An LLC also typically has advantages in comparison to ordinary S corporations. While S corporations usually allow pass-through tax treatment and limited liability for shareholders, the shareholders are more limited in their financing flexibility than are LLC members typically because Internal Revenue Code requirements prohibit more than one class of stock in S corporations. IRC § 1361(b)(1)(D). Only specific types of persons can be S corporation shareholders, moreover, and losses, gains, income, deductions, and credits have to allocated pro rata in proportion to their respective shareholder interests. See IRC § 1366 and IRC § 1361(b)(1)(B). An S corporation may lose its pass-through tax treatment if an ineligible person becomes a shareholder of the corporation.

An LLC, conversely, can have different classes of membership; and gains, losses, income, deductions, and other items may be allocated disproportionately to respective membership interest holdings without affecting the LLC's pass-through tax treatment. Moreover, a broader range of “persons” can properly hold LLC membership interests. See Cal. Corp. Code § 17001(a)-(e).

An LLC under the Act has all the powers of a natural person with respect to its business operations and dealings. See Cal. Corp. C §17003. This includes the right to be a partner, manager, associate, agent, promoter, stockholder, or agent of any other “person,” broadly defined. See Corp C §17003(k). An LLC’s statutory powers includes its right to sue and be sued, to make contracts, to lend money, and to issue notes and bonds. See Corp C §17003(b), (d), (g)-(h).

Importantly, an interest in an LLC is presumed to be a security under California law unless all the members are actively engaged in its management. See Cal. Corp. Code §25019.

When complicated rights, obligations, and responsibilities arising from LLC agreements and disputes come into play, you need sophisticated representation by experienced counsel who are fluent in the rules, laws, and regulations that can make the difference between victory and defeat. Mark Anchor Albert and Associates provides diligent, highly-intelligent and effective representation in all manner of LLC claims and problems.