Limited Liability Company

Your business, whether small or large, could benefit from being operated in a limited liability company (an LLC). LLCs provide the liability protection similar to a corporation, while offering the benefit of not having to be concerned about state compliance issues like holding meetings and keeping minutes. LLCs are best suited for businesses that operate as a small business, may take on friends and family investors and want to keep things simple.

Limited Liability Company

Limited Liability Company

An LLC may not be right for your business if you’re a start-up, or if you have plans to take on venture capital or private equity funding. It may also not be suitable, at least in California, if annual revenues are expected to exceed $250,000, as the State of California charges an entity-level tax at that level.

An LLC may also provide you and your partners flexibility in tax and profit distribution planning; corporations are more limited in that regard.

All in all, the LLC is a good place to start when thinking about which entity to choose for your small business.

Have questions. Feel free to get in touch.

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Congratulations! You just asked the best question (which is why it’s also at the top of the FAQs). You know (or at least should know) your business best, and so that also means you know what liabilities you may face. Make a list. Call up your insurance broker (you have one, right?) and talk through what’s covered and then what isn’t. Are there things out of your control, such as employees? Those are some things to consider. You can read my post on this or watch the video on this topic. It’s very important that you not waste time and money on something you may not need.

A corporation happens when “charter documents” are filed with the state, usually in a form either prescribed by the state or drafted by an attorney [ahem] and, once filed, creates a corporation. Corporations are a legal entity designed to protect its shareholders and directors from liability.

An LLC, or limited liability company, is a type of entity that protects its owners (members) and managers from liability, unless they personally do bad things. Like a corporation, an LLC happens when its Articles of Organization are filed with the state authority. In California, this is generally an online form. Keep in mind, there are other filings, and then ongoing responsibilities of those managers and members to continue shielding them from liability. And if there’s more than one Member, having a written operating agreement is highly advised. There may also be tax advantages to filing as an LLC.

You would think the answer to this is obvious, and sometimes it is. The short answer: A partnership consists of two or more individuals who operate as co-owners of a for-profit business. The partnership exists whether or not the participants intend to form an official partnership (a de facto partnership). The longer explanation: Please contact me.

Short answer: yes, but now it depends on even more than it used to. And even though I advise in the tax area, determining what entity is best for your enterprise now depends on a wide variety of factors that are specific to your entire economic situation and not just the business.

Call me! Seriously, the differences are numerous; here are a couple to get you started: LLCs have a more flexible tax structure, have fewer housekeeping requirements, but aren’t ideal for larger companies, especially those seeking outside investors. Corporations are, well, just read that last sentence but the opposite.

Aaah, if life were only that easy. Actually, sometimes it is. One rule of thumb — is it a small business not providing professional services, with no plans for investors and modest gross receipts? That’s a case where you might lean heavily toward an LLC. Investors on the horizon? Corporation. The analysis can get tortured for businesses that are larger or are growing. Real estate tends toward LLCs.

A C Corporation is a Corporation that hasn’t elected under the Internal Revenue Code to be taxed as an S Corporation. The best way to describe it is to check out what an S Corporation is. Trust me… it’s not circular.

An S Corporation is a corporation that has made an election (i.e., timely filed a form) to be taxed as a “pass-through”, i.e., the corporation itself is generally not taxed, but all of the taxes for profits and income, as well as for losses and expenses, are passed through to become the obligations of the individual shareholders. There are limitations to which corporations can elect S Corporation treatment. For example, S Corporations cannot be owned by more than 100 shareholders or by non-resident aliens. The “S” stands for . . . wait for it . . . small.

Nice. Figuring if you click here you’re home free. In a way, yes. To form one, you file Articles of Incorporation with the governing corporate authority in your state. In California, where my practice operates, that’s the Secretary of State. Articles should contain certain provisions that may or may not be obvious to you, and are not contained in most templates offered by the state or online corporate formation. Additionally, formation is the first of several steps to take to ensure that your corporation is protecting you.

You could. But you’d want a good reason to. For example, if you live there and are planning on running your business from there, makes sense. If you’re running your business in California, then incorporating in Nevada may be due to more nefarious reasons. Some attorneys like to organize their clients in Nevada because reaching an LLC’s assets through its members in Nevada is not permitted. Still, if your business is based in California, you’ll still need to register the corporation or LLC in California (too) and pay taxes in California.

You’ve read a lot about that, I’m sure. There can be reasons to form there. Here are two that come up a lot: First, your business is going to have big deal investors who like being in Delaware, sometimes for reason number . . . Second: Delaware law is corporate-centric, efficient, and can provide better protections for the corporation’s officers and directors. But like filing anywhere else, if the principal place of business is in another state, you’ll need to register your corporation (or LLC) in that state as well as filing a “foreign” corporation/LLC in Delaware.

If you’re not thinking about Delaware, then maybe. Sometimes you’re going to have to. If, for example, you’re forming an LLC for investment real estate, with a few exceptions, that state will require you to form your LLC in the state where the property is located. There may be other reasons to be in another state, but those come up rarely.

I wish the answer to this were more existential, and thus more interesting. Alas, it’s as simple as this: a corporation becomes a corporation when you duly file Articles of Incorporation, also know as charter documents, with the state official authorized to recognize and process such filings. In California, that’s the Secretary of State. In Delaware, it’s the Division of Corporations. Same for LLCs, except that formation document tends to be called Articles of Organization.

You asked a tough question for which there are several competing answers, depending on who you ask. But since you’re asking me, I typically advise: No, the LLC or corporation  cannot act as such before its state registration (for a corporation, its Articles of Incorporation; for an LLC its Articles of Organization is filed. If it does do business prior to filing, any claims against the corporation or LLC will be the responsibility of its owner(s), since the liability shield created on formation didn’t exist. That said, if you want to engage in contracts using the corporate or LLC moniker, you could execute the subject agreement by saying (for example) “Main Street LLC, a California limited liability company in formation”. This doesn’t give you the limited liability otherwise offered by having a corporation or LLC, but it does let the other side know that it will ultimately be the corporation or LLC that is the party to the contract, not you individually.

Corporations provide liability protection for its owners, as well as its officers and directors, with some exceptions. So, there’s that. Insurance covers some things, but not all. And sometimes a corporation won’t help you . . . for example, if you’re a lawyer and you commit malpractice. That’s on you, individually – corporation or not. Tax may also drive a reason to incorporate or organize as an LLC.

This is about as arcane as it gets . . . “Articles”. Be that as it may, we’re stuck with it as a word in corporate lingo. This is the document which provides the state, and therefore the public, with the initial information needed to bring the corporation into existence. It must follow certain state requirements minimally, and may also contain certain other provisions that may either be recommended generally, or may be required by certain investors. Sometimes this is referred to as the “corporate charter” or a “charter document”.

Like Articles of Incorporation, this is the document used for bringing your LLC into existence. It’s filed with the state’s authority for, well, filing such documents. In California, this is the Secretary of State. In Delaware, it’s the Division of Corporations.

That’s supposed to be the point of them, so I’m going to say . . . yes! However, you can become personally liable for your own negligence (or intentional bad acts). You may also become personally liable of the person suing you can prove that you didn’t follow corporate formalities, like holding meetings, maintaining minutes, or keeping enough working capital in the business’s accounts.

Annual meeting minutes for corporations don’t get filed. They get drafted, signed and put in the corporate records book which is typically located at the corporation’s principal place of business. No two meetings are exactly alike; if you don’t hold a meeting, then the minutes do tend to be the same as each other. If you’d like your minutes to evidence certain changes in corporate structure or a financing or other activity outside of the ordinary course of your business, then you can, if you want, simply draft that into your corporate resolutions without having to hold a physical meeting.

The Statement of Information does get filed (in California, that’s with the Secretary of State).

Yes. There are some very case-specific nuances, especially when you get down to single-member LLCs, but unlikely anything that is going to effect you generally. Don’t obsess over this one unless you have plans not to pay taxes, for example.

Some states use “Certificate of Incorporation” as an alternative to Articles of Incorporation; for example, New York and Delaware.

First things first: the question really is whether an entity is going to do you any good at all. From a liability perspective, keep in mind that anything you do is your personal problem; putting your medical practice into a corporation won’t shield you from your own malpractice. But it could, for example, shield you from your employee’s malpractice, or your file clerk’s sexual harassment claim against a fellow doctor. And it may also shield you from your partner’s malpractice. So there are upsides.

Some states, like California (where I practice), restrict the use of certain entities by professionals. The term “professional” itself has some grey area. Typically, professionals required to have a certain education, training, and experience aren’t permitted to use an LLC for their business (in California). So lawyers, doctors, etc. will generally use a corporation, though certain professions, like lawyers, etc., have other specific partnership entities available to them. Others, like real estate appraisers, are still permitted to use an LLC. There may also be tax reasons, as a professional, to put your business into an entity. There’s much to consider.

Should you? Probably not. Are you required to? Maybe. It depends on the type of profession you’re in. Lawyers, for example, are required to be in professional corporations (“PC”). Forming as a PC may require additional restrictions in your bylaws, for example concerning ownership. So if you don’t need to, generally you shouldn’t. But you may not have a choice.

This is the person who signs and causes the filing of the Articles of Incorporation (or, in the case of an LLC the Articles of Organization) with the designated state authority. In a small business, this is usually the owner/shareholder/member. Some folks have their attorney sign the documents to help expedite the process, and that’s ok (but not necessary).

Officers, in a corporate (and even LLC) setting are the individuals who perform the tasks of managing and operating the entity. In California, every corporation is required to have at least three officers: CEO, CFO, and Secretary. There can be more, but no less. LLCs don’t typically have officers, but they may at the discretion of its members.

Directors . . . direct! They set policy and guide the company with its business and direction. Directors are like the captains of ships; they know where the ship should go, and they tell the officers to make it happen.

In a word, yes. Is that always advisable? No, but it’s typical in a very small single-shareholder corporation.

The term “manager” has a specific meaning with respect to an LLC. The manager in an LLC is somewhat akin to the director in a corporation. The confusing part is that it can also be akin to the CEO or other officers of a corporation as well. Typically, the manager, well, manages the affairs of the LLC. The manager is authorized to bind the LLC, subject to restrictions that they may be bound to by law or in the operating agreement. The manager may or may not also be responsible for the operations of the LLC, though in larger LLCs, those roles are typically spread out between several individuals. In what are member-managed LLCs, each of the members is authorized to act as a manager, binding the LLC. So be careful about how you file your LLC, as you may not want every member eligible to sign contracts, and if you do, then the bank or the landlord will be looking for everyone’s signatures.

It’s tempting, when you’re starting out, to appoint all of the members as co-managers of the LLC. Y’all are excited and in a kind of honeymoon phase. And if you agree that all members are managers, you don’t have to discuss [read: negotiate] who’s “in charge”. So, two things about that: First, if you can’t overcome this issue, then you need to rethink being partners with each other. Second, picking someone who’s in charge is a process that can raise other latent issues between the members (partners). The problem: with everyone in charge, then any member can bind the LLC. And maybe that’s the idea — you want anyone to be able to sign contracts. But if one of the managers goes rogue, then you’ll regret that approach. Also, third parties may require EVERY signature of every manager if they see that all members are managers. And if you have an LLC with more than 2 members, and someone has gone sideways or off-the-grid, you’ve got a signature problem. So, appoint one person, and if you need to, have that person agree, in writing, what acts they’re permitted to engage in without a vote of the members and what acts for which they need written permission from everyone else. Think of it as appointing a CEO; there’s usually only one.

That’s the short way to say “registered agent for service of process”, which, I realize, probably still doesn’t answer your question. This is the individual or business that is charged with receiving legal process, i.e., claims from third parties and government agencies against the company. This gives the public someone to serve with legal process, since entities aren’t individuals you can find at work or home.

Here’s the answer: It’s not uncommon for a person to want to protect themselves when in a group of people and use an entity to represent their investment. The individual(s) may have other personal duties, like being on an advisory board, or being an officer. Sometimes groups of people will form an entity to control what happens to their proceeds from an investment rather than giving the entire group optics into their sub-arrangement. So it can frequently be worth the extra overhead for the additional entity. So a typical structure is an LLC to hold the property, a manager or group of managers, and then the Members, who may all be individual, or may be groups of people in various entities.

You probably didn’t think to ask this until you saw it was a question. Answer: No. S Corporations are restricted with respect to their ownership, one of the key factors why they can’t always be used. For example, no more than 100 shareholders can own shares in an S Corp, no shareholder can be a non-resident alien, and unless certain filings and compliance rules are met, they generally can’t be owned by other entities, only individuals.

And therein lies a major difference between LLCs and S Corporations – because LLCs can be owned by practically anyone or anything, making them very useful for pass-through taxation while being owned by other entities.

Yes. Well, you have the same liability protection as a multi-member LLC. There will be some specific exceptions. For example, if you are personally negligent or you are responsible for your company’s payroll tax obligations, then you’ll be exposed to personal liability. But being a single-member LLC won’t change that. There may be instances where being in a partnership may change an outcome in an insolvency situation and certain specific other circumstances.

No, but thanks for asking a weird question. You’re likely getting confused with some industries, like talent management, that may require you to obtain a license from a particular state agency. The formation of the entity doesn’t trigger automatic licensure, nor does it automatically require you to get a license for your business. Licensure for your business is separate and apart from forming an entity. And, in some instances, if you are required to obtain a license, that may dictate the kind of entity you form.

This is much more critical than some people think. A tax ID number is your corporation or LLC’s separate tax identity. Whether it’s opening a bank account, setting up payroll, or filing a tax return, this number is THE number for all purposes. Here’s how you can get one (good luck to you) or here’s how you can get one (answered by me). Important note: you need some kind of tax identification to get a Tax ID Number. Usually that original identification comes in the form of an individual’s Social Security Number (usually the person forming the entity if it’s a small business). But foreign owners have a more difficult time doing this since they don’t usually have Social Security Numbers; in that case, they need to apply for an individual tax ID number, and then use that number to get the Tax ID Number for the corporation or LLC.

You can go to the IRS’s website, and go through their multi-page question and answer pages. Make sure you’re ready with your SS-4, as the IRS may ask for that over the phone if it doesn’t like one of your answers. (PS, the IRS is not in the habit of liking.) Important note: you need some kind of tax identification to get a Tax ID Number. Usually that original identification comes in the form of an individual’s Social Security Number (usually the person forming the entity if it’s a small business). But foreign owners have a more difficult time doing this since they don’t usually have Social Security Numbers; in that case, they need to apply for an individual tax ID number, and then use that number to get the Tax ID Number for the corporation or LLC.

Since the LLC is just moving from one state to another, and not changing its structure or tax status, a new Tax ID number shouldn’t be required. The LLC would need a new Tax ID number, for example, if you terminate the LLC in one state and then start a new one in another state (or even the same state, for that matter). I haven’t seen the IRS impose new Tax ID number requirements on an entity like an LLC that moves from one state to another. In fact, applying for a new Tax ID number would likely confuse things.

YES! Of course!!
Actually, no. Though “need” is a funny word.
An attorney is not required to incorporate an entity. But if you learn nothing else from bouncing around this website, it’s that there may be a great deal of things to consider, traps for the unwary, and housekeeping items that may make or break your liability protection. Consider yourself warned!

An assignment is a document used to transfer assets from one entity or owner to another. Click here to see if you need one.

In its most basic terms, this is the money (or sometimes the assets like equipment) you put into your business. It differs from a loan in that it doesn’t accrue interest payable to you. If you put money into your corporation or LLC (or partnership), then the return of that money to you as you start to distribute money to you, is non-taxable.

No, a capital contribution isn’t necessary. But typically you would, and should, make one. You would because there’s almost no way to start a business without some kind of investment. And you should because if your corporation is “under-capitalized”, then you could be exposing yourself and fellow shareholders or members to personal liability, making the formation of the entity a waste of time and money. And it takes more than $1.00 to protect yourself (but nice try).

Sorry, but . . . LOL – no. People do try this, though. The purpose of an LLC, and therefore what it ultimately protects, by law, is to protect its owners (Members) from liability for claims made arising out of the operations of the business in the LLC. If a person obtains a judgment against you personally, it’s possible that person could eventually find their way to owning your LLC membership interest, and ultimately/possibly the assets in the LLC. It’s a long road, but anything can happen if the prize is big enough.

Any corporation can be an S Corporation, unless it doesn’t meet certain criteria. For example, an S Corporation cannot be owned by another corporation, with certain very narrow exceptions. And sometimes you don’t want your corporation to be an S Corporation, for example, when you are seeking VC investments.

S = “Small”, and, yes, that’s per the Internal Revenue Code.

For a corporation to be an S Corporation, the paperwork to make that effective is due no more than two months and 15 days after the beginning of the tax year the election is to take effect (yes, I copied that from the IRS instructions). If you’re really ahead of the game, then the timing is anytime during a tax year preceding the year you want it to be in effect. For new corporations, the tax year typically begins on a day other than January 1, unless you formed on that date. So, for example, if your corporation was formed on July 8, then the S Corp election would be due 15 days after September 7, or September 22.

You wish. But no. Congress treats this election as a go-forward business decision, not a look-back election. The good news is that it’s easy to revoke, or even “bust”, the election. But be careful about switching back and forth – as in, things don’t work that way.

You’re going to get different answers, depending on the advisor you ask, and the state you’re in. Generally, though, best practice is yes, and sometimes required.

PS – If you’re keeping this a secret from your spouse, then an S Election is not your biggest problem.

Yes. It’s really that simple. Here’s a link to the IRS page that’s chock full of info.

PS – Spouses too.

First, please take a look at this FAQ. Once you understand why you may want to use a C Corporation, you’ll understand several of the reasons that an S Corporation may not work for you. Next, other downsides include not being able to have more than 100 shareholders, and not being able to have non-individual shareholders (generally), i.e., a corporation cannot be a shareholder of an S Corporation.

Whew! A good question with a simple answer. When an LLC is formed with two or more members, it’s automatically taxed as a partnership. That’s it!

Short answer: No.
Long answer. When you turn one of your employees into a partner, that individual will switch from receiving a W-2 to getting a Schedule K-1. If you want your “partners” to be treated like an employee, then an S Corporation is the preferred approach (after you’ve determined that a C Corporation is not the right choice).

“Big” is a relative term. Size isn’t always the only, or even a significant, element to determining whether you should entity-ize your business. If you run a small business, but it’s a high-risk business, like, for example, a liquor store, then an LLC or corporation is probably a good idea, regardless of your revenue.

Short question . . . long answer. For the most part, the classic answer, which is also correct, is a C Corporation (or an S Corporation) provides limited liability for its owners and management. Either one could provide additional tax benefits. On a less obvious level, having your business in a corporation may provide it with more “respect” in the business community, and may fend off nuisance suits.

Top three reasons: Tax. Tax. Tax. Which is why they were created to begin with back in the day (1958), to encourage small business creation in the U.S. An S Corporation has a “single layer” of tax, i.e., unlike C Corporations (which is what all corporations formed in the United States are unless they make the election to be taxed as an S Corporation) which have a corporate-level tax, and then a second tax at the shareholder [LINK TO What are stockholders and shareholders] level when dividends are paid, S Corporations are taxed only at the shareholder level (though there is a state tax in California). Also, an S Corporation structure allows you to divide outflow to its shareholders (owners) between salary (taxed at higher earned income rates) and distribution (taxed at preferred non-earned income rates). There are limitations: The number of shareholders is limited, an S Corporation may have only a single class of stock , and the rules limit who or what may own shares in an S Corporation.

Establishing a sole proprietorship isn’t complicated since there are no filings to establish a sole prop business. Lots of folks just open their doors and do business, and that’s it. There are other tasks that need to be performed, like getting a business license and (sometimes) filing/publishing a fictitious business name statement if you’re going to name the business. Some people will get a tax identification number to use instead of using their social security number. Usually business owners handle these pieces on their own since they’re all pretty simple.

It’s complicated. With a (currently) flat tax rate of 21%, many businesses are considering being a C Corporation. You may want to favor/explore being a C Corporation in these circumstances: You’re exploring providing your employees with fringe benefits; you’re planning on having your business retain its earnings for future growth; you’re considering venture capital; you want different classes of stock.

If you want your business life to be simpler, LLCs are the way to go. Unlike a corporation (S Corporations and C Corporations are all corporations, right? Right!), LLCs in California don’t have a requirement to hold meetings or keep annual minutes, unless they agree to do so. LLCs are also automatically taxed as a Sole Proprietorship if there’s one owner, and taxed as a partnership for multiple owners, giving LLCs the advantage when it comes to taking on new partners and making distributions favoring one partner over another, so long as certain rules are met. S Corporations, on the other hand, are much more rigid in how you can structure distributions. So if simple and flexible is the priority, LLC is the better choice.

It’s Opposite Day! Take a look at this FAQ: When should I use a C Corporation for my business and if none of those apply, then you should probably steer away from a C Corporation [LINK TO What is a C corporation] due to the downsides of double taxation, where the income is taxed on its way in to the corporation, and then on its way out as a dividend to the shareholders.

True! California has placed a limit on what businesses can be operated out of an LLC. The general rule is no professionals, and though typically the rules point to any professional named in California’s Business and Professions Code, there are some exceptions. One exception is licensed contractors; additionally, some “professions” that don’t require testing, experience, or certain skills may also be exempt.

California varies – sometimes it’s a matter of days, but sometimes, especially at the beginning of the year, it can take a couple weeks. You can always submit your documents on a rush (24 hours or even same day) basis. Other states? It really depends. Delaware’s quick.

It can, but not always. It’s not often the case that a business will put their business into an entity solely to save on taxes, although S Corporations for small businesses are frequently and legitimately used for that purpose.

A tax allocation is what happens in your tax world when you’re a partner in a partnership (or a member in an LLC taxed as a partnership). Partnerships themselves generally are not taxed; the tax obligations are “passed through” to its partners. So you might think: well, if the partnership doesn’t give (distribute) any money to me, then as a partner I don’t have to pay the tax. Nice try! To ensure that Uncle Sam gets its pound of flesh, the tax rules will allocate to you, or deem a payment made to you, whether you’re actually paid or not, out of the profit of the LLC (or partnership) based on your percentage interest in the LLC/partnership. That deemed payment is an allocation, and you as a partner will pay tax on that allocation, whether you receive any money or not.

In addition to the expenses you’ll incur for forming your corporation or LLC, there will be a number of expenses you should take into consideration when weighing the pros and cons of operating from an entity. Here’s a short list: an additional tax return (CPA fees), $800 minimum to the California Franchise Tax Board (regardless of the level of revenue or profit), possible payroll service (in the case of a corporation), annual filing with the Secretary of State (biannual for an LLC), and for a corporation the costs for the preparation of annual minutes (aka resolutions, consents, minutes). So the decision to put your business into a corporation or LLC should be made based on comparing the pros of limited liability and possible tax benefits against the costs and time spent in keeping the corporation or LLC compliant. Also, keep in mind that the costs may increase depending on the nature of the business you’re conducting. For example, lawyers are also required to register their corporation with the California State Bar, for a fee.

Actually, nothing. To bring a corporation into existence, you submit your Articles of Incorporation with the government agency responsible for processing that paperwork in your state. By submitting the Articles, or “Charter Documents”, and the act by the agency of approving same, you have formed a corporation. You can say “file” if you want.

There’s some paperwork . . . corporations tend to have more paperwork, which is why some people might immediately gravitate to LLCs, or nothing at all. And, yes, if you want to maintain your status as a corporation, and maintain your limited liability, don’t cut corners on the paperwork. It’s important.

If you have an existing business, then its assets and contracts should get transferred to your corporation. This can look like an assignment, or a bill of sale. There are tax considerations regarding contribution of the assets of your existing business. You may also need to notify third parties, such as vendors and landlords. A stitch in time, as they say. Paperwork is king.

The answer in most situations is going to be yes. One of the virtues of an LLC is its simplicity. Once you choose to form your business as a corporation (and then an S Corporation), or to have your LLC elect to be taxed as an S Corporation, costs for tax returns, payroll, corporate state compliance paperwork, and other accounting items get triggered. You’ll need to balance the benefits of an S Corporation against the ease of use that comes with an LLC.

No. You may get background checked as a vendor, even if you put your business in a corporation. But incorporating does not require any background checking.

Also known as a DBA (doing business as), if your entity is using a name for its business that’s different from its entity name, then you are using a fictitious business name, and state law requires that you file a fictitious business name statement in the county you are operating out of that records the name of your business and the name of the entity using that name. It’s also a good idea to file even if you don’t want to, because it’s helpful evidence to prove the use of your name from a certain point in time, which helps you to defend or bring trademark infringement claims.

Yes it does. And in California, applications for business licenses are handled at the city level. For example, here’s a link to the San Francisco business license registrations: https://sftreasurer.org/business/register-business

That would be nice, but this is the beginning of you needing to think about why you formed the corporation to begin with: to make it separate from the sins of the past. So, no, you will need a new bank account, with a new tax ID number. Sorry.

A share represents a shareholder’s ownership in a corporation. This can either be evidenced by a paper certificate or an entry in the corporation’s books.

Authorized shares are the number of shares your corporation is authorized to issue. You do not have to issue all of your authorized shares, and frequently it can be a mistake to do so. Authorized shares merely sit on the corporate books as shares available to issue. If you need to issue more shares than are authorized, you will need to amend the corporations’s Articles.

Directors are the individuals who direct or guide the corporation with respect to its overall business model and, well, direction. The board sets policy and votes on major or extraordinary decisions. Shareholders elect directors, and directors elect officers. The “board” is the entirety of all of the directors.

Whether for a corporation or in any business or political setting, bylaws are the rules that govern the procedures of the particular entity. In a corporation, the bylaws is the set of rules which address, for example, when meetings will be held, and what the duties of the officers are. Though it’s a standard document for a corporation, some LLCs will also choose to have bylaws separate from their operating agreement. Some bylaws are considered “off the shelf”, but your business, like any other, is unique, and therefore it’s a document that should be reviewed and drafted carefully to suit your particular needs.

Novices to LLCs tend to think that this is the document governing the actual operations of the company. Not so. The operating agreement, also sometimes known as the LLC Agreement (or some variation), is the governing document for the LLC itself. It may be very short, defining merely who the members are and what their respective ownership percentages are. Added to that, there may be restrictions on the transfer of the ownership interest, as well as guidelines for meetings, consent rights, call rights, and so on. These are contracts that can become quite complex.

Need? No. But if I were a litigation attorney who made money off of people’s mistakes, I’d say “Don’t have one and let the chips fall where they may — better yet, let state law govern your rights and duties.” But I’m in the business of preventative law. So, yes, you should have an operating agreement. Just by way of example, without one, the death of your partner will cause you to become partners with your dead partner’s surviving spouse — think about that one for a minute. There’s no way out of that without a written operating agreement providing for a buy-out.

No, no, and no. In California, all that’s required for a contract (which is what an operating agreement is) to be effective, other than for residential real estate contracts, is a signature. And if the contract provides for an alternate method of signature, like exchanging documents in PDF format over email so that the signatures don’t all have to be originals, then you can use that method as well. In smaller transactions, emailing PDFs can be very helpful, but the document needs to provide for it. Initialing each page, witnessing and notarizing may be effective in other states, and if done in California, can create confusion as to whether a document was agreed to at the outset.

A Shareholders Agreement, if written correctly, will a) limit each shareholder’s ability to transfer his/her/their/its shares in a corporation, b) provide for certain voting rights or limitations on voting rights, and c) give the corporation and each shareholder the option to purchase the shares of a deceased or withdrawing shareholder. Its purpose is to minimize disputes, allow for smooth transitions, and reserve voting power to those shareholders who have provided the most capital or who have negotiated the ability to guide and operate the corporation’s business. Do you need one? Click here

Well, without it, you could easily be engaged in litigation down the road. By way of example, without an agreement in place, the shares of a deceased shareholder will vest in that shareholder’s heirs, who will then be able to review the corporation’s books and vote. If that person doesn’t understand what’s best for the corporation, then eventually you could find yourself dissolving the corporation and selling the business. Like with Operating Agreements, you do not “need” a Shareholders Agreement. That is, there is no law requiring it. But entering into a business relationship with other shareholders without a Shareholders Agreement exposes you, your fellow shareholders, and the business, to significant risk.

Frequently a Buy-Sell Agreement is the name used for a Shareholders Agreement in a corporation. Sometimes, though, a Buy-Sell Agreement only refers to that part of a Shareholders Agreement that provides for the remaining shareholders to purchase a deceased or withdrawing shareholders’ shares. Though a solid first step, ideally your corporation would be protected by all of the terms and conditions of a more robust Shareholders Agreement.

Unanimous voting rights can bog down the governance of any enterprise, especially where there are several owners. Sometimes it’s necessary when, say, you have only two owners and they both want to be sure to be included in every decision. Typically, though, unless required by law, you’ll want to avoid unanimous voting requirements, opting instead for majority voting or “super-majority“. At least that way you’re not being held hostage by minority owners.

Voting rights in your entity are an important element of its governance. Sometimes a minority investor, or group of investors, may want the right to vote (or veto) certain business decisions, even though they don’t have the equity to sway a vote. Nevertheless, you may want to give them certain veto rights as part of sweetening their interest. Super-majority voting can create another level of complexity to your Operating Agreement or Shareholder Agreement, but may be worth it if the alternative is unanimous voting.

Capitalization can mean a couple of things. At first it usually refers to the contributions of money or property that the owners (shareholders or members) have contributed to the business, their “capital contributions”. Later on, or as a result, or in anticipation of such contributions, it may refer to a capitalization chart or table, which will set out each owner and their percentage interest in the entity.

Simply put, those are the owners, and they can be in many shapes and sizes. A shareholder can be an individual who owns shares in GM or Microsoft; it can be you, owning 100% of the issued shares in your own corporation. It can be another corporation or venture capital firm owning shares in your start-up. “Stockholder” and “shareholder” typically means the same thing.

Good question. This concept often gets confused with “authorized shares”. Issued shares are those shares that the corporation has actually “issued”, i.e., transferred to a shareholder. This can be in the form of a certificate, and that can be typical in a small business. In larger businesses, the ownership of issued shares is usually a journal entry in the corporation’s books and records, or with the broker. The number of issues shares cannot exceed the number of authorized shares.

Directors are the individuals who make up the board of directors. Due to the responsibility these individuals have, it’s common for the corporation to obtain insurance to cover the directors (aka D&O insurance) for the decisions they make, even though the existence of the corporation is supposed to shield – sometimes things don’t go the way you expect . . . pesky lawyers!!

Hopefully something that you have plenty of! A dividend is the cash (or property) that is transferred from the corporation to its shareholders after all expenses are paid, including the corporation’s taxes. Only C Corporations pay “dividends”; S Corporations make “distributions”, since S Corporations themselves do not generally pay taxes. A dividend is not a deductible expense of the corporation.

In lay terms, a distribution is another way of saying a payment to a shareholder, partner or member of the business’s profit. Typically the distribution is in the form of cash, but sometimes it’s in the form of property like an asset. What you receive typically depends on your percentage interest in the business. So if a business has a $100 profit, and you own 40% of the business, then you’d receive a distribution of $40. The tax law surrounding distributions (and allocations) is complex; if you are involved in a venture that’s making distributions, you should be sure to have a solid CPA or accountant on your team.

A CEO is the Chief Executive Officer. This is the person responsible for over-seeing all of the day-to-day activities of the corporation. Sometimes LLCs have CEOs. The CEO is the face of the company, and so larger businesses tend to hire a CEO that has appeal to the public to encourage investment in the business, or to attract new customers. The CEO, when it comes to extraordinary decisions, seeks and takes direction from the board of directors. The CEO can be, but need not be, a shareholder.

The Chief Financial Officer, sometimes known as the treasurer, handles the financial aspects of the corporation or LLC. In larger businesses, the CFO becomes an advisor to the CEO, conferring on best approaches for increasing business or investment. In a very small business, the CEO and CFO are frequently the same person, and there’s nothing wrong with that.

Corporate secretaries are the unsung heroes in the officer world. They are responsible for the grunt work of the corporation or LLC, making sure i’s are dotted, t’s crossed, taking corporate minutes, and frequently interacting with the business’s lawyer to make sure paperwork and corporate housekeeping are all in order. In a very small business, the corporate secretary is frequently the same person as the CFO and the CEO. In larger businesses, you’ll want to try to make the CEO and corporate secretary two different people, since there may be occasion when refinancing or issuing shares to a corporate investor will require that the secretary attest to the identity of the CEO, which gets awkward when it’s the same person. The position of Secretary is required under California law.

The position of Chief Operating Officer is not required under state law, but businesses that are growing, or intend to grow, will almost always have one. The COO is responsible for the day-to-day of the business, and usually reports to the CEO. And so I know I said that that’s the CEO’s job; in larger businesses, those responsibilities are handed over to the COO, so that the CEO has more time to develop new strategies to grow the business.

It depends. A vice president in your corporation (or LLC) is tasked with acting on behalf of the CEO or President of the entity. This could come in handy if you, presumably being the CEO, aren’t available to sign a particular emergent contract. In your absence, the VP would act on your behalf with all corporate authority. So for continuity of operations, it does help. But be sure it’s someone you trust, since third parties aren’t generally responsible for making sure that the person acting on behalf of the LLC or the corporation is authorized, unless that third party has reason to understand otherwise.

Strictly speaking, every California corporation is required to have a CEO. So the real question is whether your corporation should also have a President. The President of a corporation is typically tasked with general supervision, direction and control of the business and officers of the corporation. Practically, though, where there’s already a CEO, the President might be the highest ranking officer for a particular division or sub-enterprise of the corporate business. So, for example, in the case of a real estate brokerage corporation, the CEO is tasked with the same tasks as the President, but with respect to the entire corporation and all regions. Installing a President of the San Francisco region would give the corporation an individual who would report to the CEO and to whom all employees and agents in the San Francisco region would report.

Corporations under most state laws, including California, require that the shareholders and the board of directors of a corporation hold an annual meeting. Some LLC statutes require it as well, though not in California. Those meetings are opportunities to vote on annual issues, like elections of officers and review last year’s financials. In very small businesses, these meetings may be memorialized by consents . . . you don’t have to hold an actual meeting with yourself (unless that’s your thing and you’re looking for a “legit” reason to deduct a trip to Hawaii for a shareholder’s meeting – that won’t really work, by the way).

In very lay terms, a K-1 is the partnership equivalent of an employee’s W-2 or a contractor’s 1099. Because a partnership doesn’t generally pay taxes of its own, it issues a form to each of its partners, telling the partners what each of them needs to put on his/her/its own tax return. LLCs taxed as a partnership (the default for multiple-member LLCs) issue K-1s. For more on forming partnerships, here’s an article. Or, if you prefer to be entertained, here’s a video.

Being a member in an LLC is similar to being a shareholder in a corporation, or simply being an owner in a business. The members of an LLC are its owners, and typically if there’s more than one, they will sign an Operating Agreement which is a contract governing their rights and duties with respect to each other and the LLC.

Typically an LLC enters into its contracts by and through its authorized representatives. For an LLC, that’s going to be its Manager, or one of its Managers if it has more than one. However, if the LLC has chosen to walk and talk like a corporation, it’s going to be the LLC’s CEO, President, Vice President, or some other authorized officer.

Well, if I was your mother, I’d say yes, that’s very complicated, and please just pay him for services rendered. But, as your lawyer, adding him is not that complicated. However, the result is that you’ve now turned what was essentially a sole proprietorship into a partnership, requiring tax returns, fiduciary duties, and ideally, a written partnership agreement for when you want to show your boyfriend the door and buy back his membership interest.

Nope. There are some pretty strict rules on what you get to name your corporation. Most of those rules can be found in a document regularly updated by the Secretary of State (in California) — click here to take a look. For example, in California, a corporation need not have “Inc.” at the end of its name, but an LLC needs to have “LLC”, or “limited liability company”, after its name. And here’s a new one, even on me: The word “Holding” or “Holdings” is considered to be a “dropped” word in a corporate name, i.e., it’s ignored for purposes of figuring out if your name matches one already taken. For example, Herzog Wonderful Legal, Inc. is the same as Herzog Wonderful Legal Holding, Inc.

It depends. Typically there’s the name you used to formed your entity, and then there’s the name you do business as, which may be two different things, and both require paperwork. In the case of the name you do business as, that may be expose you to trademark or service mark infringement.

Depending on what state your company is located in, this could be as simple as filing a single form with that state’s governing agency. In some states, this may be more complicated, but there’s always a way. Keep in mind, by converting the entity, you will likely have to get it a new Tax ID Number, since it’s now a different entity. If there’s a partnership agreement, or certain rights with respect to voting or capital return, be careful about property transferring all of that over. Consult with tax and legal counsel.

California, and many other states, require an annual or biannual report filing detailing the names and addresses of the directors and officers (or managers in the case of an LLC). It’s part of the social contract entities have with the public – liability protection in return for transparency. Not filing an SOI can eventually lead to suspension of the corporate or LLC charter, thereby exposing the entity’s owners to personal liability. In California, the first one is due within 90 days of filing the Articles of Incorporation or Articles of Organization.

Yes. It’s not always ideal, especially if you’re looking at growing or bringing in investors, but the law allows it.

And please stop calling it “my corporation”. The more you do that, the more you expose yourself to personal liability. Think of it as separate and apart from you, and the rest of the world will too.

Not necessarily. In California, the default rule is one director per shareholder, and if there are more than 3 shareholders, then 3 minimum. You can always have more directors than is required by law, and you can even contract to have fewer than is required, so long as the shareholders agree to that.

In terms of capital (i.e., cash money), it depends on your business; one common rule of thumb is 3 months’ worth of cash to run the business. If you mean compliance, you’ll need annual minutes and, in California, an annual filing with the Secretary of State. You’ll also need to memorialize extraordinary transactions, like leases and financings, in your corporate records. Without minutes and/or consents, you could expose the shareholders to personal liability, known as “piercing the corporate veil”.

Corporate minutes memorialize actions voted on and authorized by the corporation’s shareholders and directors at duly noticed meetings. Keeping these minutes up to date is critical to maintain the corporation’s liability shield, because without them, a claim could be made that the corporation as an entity separate from its shareholders wasn’t being treated seriously and so loses its shield. The Secretary of the corporation is typically the person in charge of keeping track of the corporate records, including its minutes. Minutes are sometimes referred to as consents or resolutions, depending on how they’re drafted.

The answer to this is similar to the answer for the same question for corporations. However, with LLCs, unless the members require it in their operating agreement, there’s no requirement for meetings and consents, unless the written consents are required by a third party, like a bank. This is the reason some folks try to use LLCs instead of corporations.

Yes. But depending on what stage the business is at, they may not be immediately deductible as an operating expense, but may need to be treated as a start-up expense. This can get complicated; you should consult a tax advisor.

Remember, one point of the entity is to keep your business separate from your personal affairs, thereby protecting your personal assets. So, the answer is going to be yes. As such, that will also involve obtaining a tax identification number.

No. But depending on the directors‘ background, level of experience, and the value they bring to your business, you may want to consider some kind of compensation or even equity. Not only are they worth it, but you’ll get a commitment from them that won’t otherwise exist if they’re just donating time and expertise. Specifically with respect to officers, there is an expectation of payment.

I’m proud of you for asking such a clever question. Makes me wish the answer was just as thoughtful. Alas, it’s not: there’s no difference. A shareholder in a corporation, and a member in an LLC, are both nomenclature for defining owner. In fact, LLCs are flexible enough such that they can be structured to look like corporations, so their owners may also end up being “shareholders”. All that said, members in LLCs and shareholders in corporations are governed by different statutes, so their respective rights may differ.

It used to mean more than it does now. California has dropped this as a concept, and where it’s still used, it’s for tax and fees purposes. Some states tax corporations based on capitalization, and they use par value to assess that tax. So you should not just “pick a number”. Some of the fees and taxes can be very expensive, so proceed cautiously. Delaware, for example, uses par value.

Terminating an LLC in California is a pretty simple affair. I wouldn’t blame you if this is the one thing you choose to DIY, since you can do it online. There are legal issues, though, in terminating an LLC or any entity. For example, you need to make sure that the LLC’s debts are paid or accounted for, including its taxes. And you’ll need the consent of a majority in interest of the membership. Having unanimous consent could cut the paperwork significantly.

So long as all of your taxes are paid up with the FTB and you don’t owe any third parties any money, then you can terminate the LLC using the Secretary of State’s website to terminate it. Or if you prefer, we can also handle that for you. If it turns out you DO owe taxes or other third parties, understand that a) the Secretary of State may not allow the termination unless taxes are paid, or b) they’ll allow it, but with the understanding that you (as a member of the LLC) will become personally liable for taxes and other debts. Once terminated, you can then file a Fictitious Business Name statement in the county in which your principal place of business is conducted. So the answer is yes, you can shut down the LLC and transfer the operations to you individually and DBA in the name of your business (without the “LLC” moniker).

Though I appreciate your need to be thrifty when it comes to starting a new business, this sort of money-saving approach is inadvisable. Occasionally a company will have a “division” or some other kind of structure that makes sense by way of keeping all things under one umbrella. For example, a hardware store may open a division for its garden center. But if the businesses aren’t closely related like that, then combining could lead to myriad problems: claims for one business will easily attach to the other business, books and records for one business will be discoverable in a lawsuit against the other business, accounting will be harder to track. The list goes on. Just don’t do it. But click here to see my FAQ on whether you need an entity for your business at all.

You need to declare a par value only when the state in which your corporation has been filed requires it. Delaware requires it.

Limited partnerships (LP) have been the go-to entity for certain kinds of industries for years. The most prevalent use has been in real estate, where the ownership is usually made up of one person who manages the operations and the cash flow, and the rest of the partners are silent partners, or “limited partners”. Why limited? “Limited” in this context means that the liability, or financial exposure, of the silent partners is limited to what they put into the partnership. So if there’s a claim against the partnership, the managing partner, known as the General Partner (the GP), bears the brunt of the liability, which may very well exceed the GP’s investment. LPs are going by way of the dinosaur as LLCs become the more favored entity for real estate development.

A general partnership (GP) can come in very handy when you want to be in a joint venture or some other enterprise, and liability is either not an issue, or each “partner” has their own entity for liability protection. In fact, people who start “doing something” together can find themselves in a general partnership without even intending to be, at which point serious legal problems ensue. Boiled down, a GP is merely an arrangement in which two or more people engage in an enterprise for profit. “Forming” a GP doesn’t require any paperwork, though in some states like California you can file paperwork with the Secretary of State to put the public on notice of who has the authority to bind the partnership. Ultimately, if you need any kind of liability protection, then you’re looking at an LLC or a corporation, not a general partnership.

Link to article —  Partnerships: Initial Legal Considerations

In short . . . yes. Who knew?!