Why Operate Your California Business as an LLC?

An LLC, or limited liability company, is a flexible business structure that is well-suited for small to medium-sized business. It is less formal than a corporation, but still offers the business owner the benefits of limited liability.

Limited Liability Companies and corporations can trace their origins to European venture capitalism in the 17th century when shipping companies pooled investor money together and limited the investors’ liability to the stake of their investment. If a ship had a successful venture, its investors would enjoy the same percentage of profits as their percentage investment stake in the company. If, unfortunately, the ship was lost at sea or incurred debts to others, the investors were limited in liability to losing the money they invested.

Benefits of an LLC Business

In today’s world, business owners can form an LLC to limit liability from a business to their investment and enjoy pass-through treatment under IRS tax regulations. Another benefit of the limited liability company is that you don’t need to hold as many records, board meetings and approvals as a corporation.

For example, a corporation has to have an annual meeting of the Board of Directors. The company appoints executives to serve as directors of the company and vote on how the business will be operated. When changes are needed to the way the Company operates or it has significant changes in its ownership or management compensation, it needs to vote on and approve those transactions by a majority vote of the Board of Directors. A Limited Liability Company is not required to have annual meetings. Typically, the LLC files Articles of Organization and then, shortly after that, drafts an operating agreement. LLC members are free to run a business without the strict formality of a corporation.


LLC Operating Agreement

Usually, an LLC will draft an Operating Agreement that will dictate the contributions of its members and establish its ownership. Some managers may run the company daily and contribute “sweat equity”, while others may only contribute financial investment with limited involvement in the company and its day-to-day operations. Sometimes there will be a mix.
The Operating Agreement can help the company and its managing members outline how the business will be structured, how it can determine its value, and who has the authority or responsibility to serve in different roles for the company. The operating agreement can establish methods to value the Company at a later date when members may wish to exit the company and be “bought out.”

California LLC Statement of Information

When there are significant changes in the management of a corporation, it needs to update its statement of information with the State of California. Corporations must file a statement of information every year, whereas an LLC needs to file a Statement of Information every other year.

Ownership Changes

When ownership changes in an LLC, it simply needs to update its operating agreement through an amendment reflecting the changes in the company’s ownership. When a corporation changes ownership through stock transfer, it needs to keep diligent records of that transfer, agree upon methods of company stock valuation, and major developments in corporate governance by director approval or their unanimous written consent.

LLC vs. Corporation

A corporation may be a better idea for your company if you plan on issuing stock or plan on growing the business in the future to take on investors. Also, in California a corporation is mandatory if your company is a professional corporation of state-licensed professionals (for example, doctors, lawyers, engineers or accountants) that cannot be organized as a limited liability company.

LLC managers should be given a reasonable salary while working at the company, and the company may retain or distribute its profits or losses to its owners, pro rata. Pass-through tax treatment allows the business to have its tax liability pass through the business, which may pay nominal taxes, to its control person, usually its owners, in proportion to their ownership stake in the company.

For more information on tax issues, our firm can refer you to local accountants.

As you can see a LLC will give a small to medium sized business much greater flexibility and less red tape than you would encounter operating your business as a corporation.

To get your California LLC or S-corporation started, give us a call at (858) 926-5797 or contact us here. We can assist you with:

  • Filing your Articles of Organization
  • Drafting your Company’s Operating Agreement
  • Getting an EIN number
  • Opening a company bank account
  • Drafting Employment Agreements
  • Drafting and reviewing contracts
  • Transferring ownership of your company
  • Insuring against risk
  • Winding up your company
  • Serving as General Counsel to your company

Thank you for watching this brief informational video. If you would like to learn more, contact our San Diego business attorneys today to develop a strategy to grow and organize your business into its ultimate potential.

Latest News & Updates

Meet Our San Diego Attorneys

Thomas F. Gallagher, Esq.

Troy B. Krich, Esq.

Contact Gallagher Krich, APC

What Clients Say:

Mike K., Google

Rated 5 out of 5
August 11, 2023

Thank you so much for all your help in resolving a real estate matter so quickly and efficiently.

Mike K
Verified

What Clients Say:

Jonas Y., Google

Rated 5 out of 5
December 28, 2022

If you need a “ Closer”, go see Troy. Troy has been one of the best attorneys I have ever worked with. I don’t typically give reviews but after the last case Troy helped me settle out of court, I won’t hesitate to use Troy again! Thanks for all you do Troy !

Jonas Y
Verified

What Clients Say:

Daniel E., Google

Rated 5 out of 5
October 11, 2022

I left a voicemail for Tom late Sunday evening and received a phone call first thing the next morning.

Tom was very quick to reply to any questions I had, and if he was caught up in a meeting, he was sure to return my call promptly.

Tom provided sound and logical advice, during a very stressful and uncertain time. At times I asked him to be more aggressive and was often met with the pros and cons of that decision, allowing me to understand the approach and thought process behind his strategy.

Ultimately he provided options for several paths for us to take, worked swiftly, and got us where we needed to be.

He reached out several times to check on my sanity and make sure I was good.

As someone with very high expectations, I would highly recommend his services. He provided expertise that proved to be successful, and also took the time to make sure I was emotionally solid.

Tom assisted with me with a 50% / 50% ownership conflict.

Daniel E
Verified

What Clients Say:

Deanna, LawConnect.com

Rated 5 out of 5
February 23, 2022

Really informative and actionable, very grateful to have connected and I look forward to working more with them in the future.

Deanna
Verified

What Clients Say:

Marilyn, LawConnect.com

Rated 5 out of 5
February 8, 2022

i liked that a lawyer, and not a staff member, called me to get the details and he gave me his opinion of what his initial thoughts are about my case.

Marilyn
Verified

What Clients Say:

Bob W., Google

Rated 5 out of 5
August 30, 2021

What was thought to be a simple breach of contract turned into a nightmare. Through their tenacity and their deep knowledge of the law, we were successful. There is no reason to look any further as you will not get any better representation than this firm. I highly recommend them and strongly suggest that if you are considering starting a business or are already managing one, this firm will guide you, avoiding the troubled waters businesses sometimes find themselves in.

Bob W
Verified

What Clients Say:

Rasmita M., Google

Rated 5 out of 5
August 13, 2021

Johnny Nitti helped us with our estate plan. He was very meticulous while drafting the plan and spent enough time to explain the details to us. He filed the deed with county recorder and paid for the fees himself. Overall, Johnny did a great job and we definitely plan to work with him in the future for any updates to our EP.

Rasmita M
Verified

What Clients Say:

George A., Google

Rated 5 out of 5
August 7, 2021

Johnny Nitti helped me with my estate planning (will, living trust, etc.) and made the process smooth. He is very responsive and organized. I highly recommend contacting Johnny.

George A
Verified

What Clients Say:

Ashley C., Google

Rated 5 out of 5
July 18, 2020

Tom Gallagher is very knowledgeable and helpful when it comes to business law. I reached out to him reguarding the Pandemic and my salon and I’m so glad I did. Many times stress and hard times can fog clarity and he really helped me understand the laws.

Thanks Tom!!!

Ashley C
Verified

What Clients Say:

Evan D., Google

Rated 5 out of 5
July 16, 2019

Thank you Troy for everything! Professional, prompt, and smooth handling of my case. I will be recommending to anyone that is in need of a lawyer.

Evan D
Verified