Business Formation

A limited liability company (LLC) is a company that offers corporate liability protection, but usually operates and is usually taxed as either a sole proprietorship or a partnership.  

• Owners of an LLC are referred to as members, and
• the people who operate the LLC are called managers.  

LLCs are either member-managed or manager(s) managed.  

• A member-managed LLC is one that is managed by all the members of the LLC, whereas
• a Manager managed LLC is operated by one or more managers that may or may not be members.

The LLC is formed upon filing of the Articles of Organization with the Secretary of State and the members entering into either an oral or written Operating Agreement.  Not all businesses can be an LLC in California, so you should consult with an attorney as to whether or not your business can be formed as an LLC.  

To maximize corporate protection, it is important to seek legal advice as to:

• whether an LLC is the best type of entity for your business,
• how to properly form an LLC,  
• how to operate the LLC and
• the on-going legal requirements once the LLC is formed

The corporate protection granted for an LLC in general means that the members are not personally liable for the debts of the LLC.  This protection is limited, and you should consult with an attorney to understand what liabilities the members and/or the managers are protected from and when personal liability exists.  

A corporation is a separate entity that is formed for the benefit of its shareholders.  

• Owners of the corporation are called Shareholders.  
• Board of Directors make the major decisions of the corporation and are elected at least annually by the shareholders.  

Officers are employees of the corporation appointed by the board of directors to operate the day-to-day operations of the corporation, and they are the President or Chief Executive Officer, Secretary and Treasurer or Chief Financial Officer at a minimum.

The filing of the Articles of Incorporation with the California Secretary of State begins the corporate formation.  There are many more documents that an attorney can assist you in preparing and filing to ensure the corporation is formed correct and complete.  

To maximize corporate protection, it is important to seek legal advice as to:

• whether a corporation is the best type of entity for your business,
• how to properly form a corporation,
• understanding the rights and responsibilities of the various roles in a corporation,  
• how to operate the corporation and
• the on-going legal requirements once the corporation is formed

The corporate protection granted for a corporation in general means that the shareholders, officers and directors are not personally liable for the debts of the corporation.  This protection is limited, and you should consult with an attorney to understand what liabilities the shareholders, officers and directors are protected from and when personal liability exists.  

A company can usually be formed as

• a sole proprietorship,
• partnership,
• corporation or
• LLC (Limited Liability Company)

Certain licensed businesses in California can be filed as:

• limited liability partnerships or
• professional corporations  

The decision as to what type of business structure would be best for your company includes such factors as how much liability protection from the businesses debts you want, your personal tax situation, and how formal or informal a business you want to form and operate.  

• A sole proprietorship and general partnership offer the least liability protection but can be as formal or informal as the parties want.  
• An LLC and a corporation offer more liability protection from the business's debts but are a more formal process to form and operate.  

An attorney can explain

• how the different types of entities are formed,
• how they are legally required to operate, and
• your on-going legal requirements once they are formed.  

A qualified attorney can also advise you on:

• which entity would be best for you based on the above factors,  
• whether it is a licensed business,
• your future plans for owning or selling the company, or bringing in future investors,
• and other considerations.  

A CPA should be consulted with regarding the tax structures for the different types of entities.  

The online companies that provide incorporation services, such as LegalZoom or your accountant, cannot provide you legal advice.  

Only an attorney can provide the legal advice in:

• understanding the different types of entities and which type of entity is the best for meeting your needs;
• knowing all documents needed for corporate (or LLC) formation and how to complete them properly;
• knowing what are the legal requirements and all government entities involved with the formation of your corporation,  
• advising on operating your corporation within compliance of the law; and
• what your ongoing legal requirements are once your corporation is formed.

As an attorney who has advised businesses over 20 years on corporate formation, and cleaned up many corporations formed without attorneys, the legal advice from a qualified attorney to understand what it truly means to be incorporated in California is invaluable.

Rarely does forming a Nevada Corporation or Delaware Corporation allow a company to avoid California’s tax laws and California’s employment laws.  The short rule is that if you are “doing business” in California, you are subject to its laws.   It is a balancing test as to whether you are “doing business” in California, depending on the quantity and depth of your connections to California.  If you are incorporated in another state, then do business in California, you have to be legally registered in California, and you have to comply with all California laws.  This means that your company would be subject to two different state laws. It is important to consult with an attorney before incorporating (or forming an LLC or any other type of entity) inside or outside California if you have any ties to California.