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Articles of organization must be filed with California to form California LLC. While an operating agreement does not have to be filed, it is an important document that you should have, setting forth the members’ rights and responsibilities, their share of ownership, their voting rights, their shares of profits and losses and their distribution rights, all of which can be different and without regard to their capital contribution. One or more managers make management decisions and “run the business” for the inactive members.
As the name “LLC” implies, California LLC provides the same limited liability for its members as does a corporation. Members enjoy limited liability for the debts, obligations and liabilities incurred by the business as well as liability stemming from possible legal action. Normally, members cannot lose more than the amount they invested in the LLC. If the LLC goes bankrupt, the members will not be liable for its debts. Should someone sue the LLC and it is found liable, they can take the LLC’s property to satisfy the judgment but if that property does not satisfy the judgment, they will not be able to take a member’s personal assets, i.e. home, car, or bank account. Protection of members’ personal assets is a major advantage of California LLC. There are exceptions to members’ limited liability to keep in mind. For example an exception to a member's limited liability occurs when the LLC has recklessly harmed people or has been used to perpetuate a fraud.
California LLC Taxation
California LLC can choose to be taxed as a corporation or choose the pass through tax structure of proprietorships, partnerships and S Corporations. Also, the distribution of profits and losses can differ from members’ share of ownership. While California LLC and California S Corporation are essentially alike, an LLC is much more flexible and is easier and less complicated to operate than a corporation.
Why Form California LLC?
For those who want the same limited liability as a corporation but without the formal structure and more cumbersome ongoing requirements, California LLC’s flexibility and simplicity offer a distinct advantage over a corporation. California S Corporation does, however, offer the advantage of allowing owners to minimize self employment taxes.
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Some Points to Consider When Forming California LLC
Members & Employees
This information is not an attempt to present all you should know when forming an LLC in California but rather to present just some of the basic information about California LLCs. While we make every effort to ensure its accuracy, MaxFilings does not guarantee that all of the information is accurate, complete and/or current and it should therefore be independently verified. And, as always, you should seek the advice of qualified professionals who are familiar with your circumstances as well as applicable federal and California laws.
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