Question: I reserved a name for my to be formed California limited liability company. Can I transfer the name reservation to another person or entity who wants to form a CA LLC with the reserved name?
Answer: Yes. Transfers of name reservations are authorized by California RULLCA Section 17701.09(b).
Question: My California limited liability company was formed before January 1, 2014, the date California’s new LLC act became effective. Do I have to amend the LLC’s Articles of Organization filed with the California Secretary of State?
Answer: If a manager managed California LLC was formed before 2014 and its Articles of Organization do not state that the LLC is managed by a sole manager or by more than one manager, the LLC must amend its Articles of Organization and specify the type of management. California Revised Uniform Limited Liability Company Act Section 17702.01(b)(5) states “If the limited liability company is to be manager-managed, the articles of organization shall contain a statement to that effect.”
To amend your California LLC’s Articles of Organization file one of the following documents with the California Secretary of State:
Warning: If you want your California LLC to be manager managed the Operating Agreement must also contain certain manager managed language. Stated another way, a California LLC is member managed unless the following two conditions are satisfied:
See California RULLCA Section 17704.07(a).
Question: My California limited liability company intends to change its agent for service of process, aka its resident agent. How does a California LLC change its agent for service of process with the California Secretary of State?
Answer: A member or manager of the California LLC must file a revised Statement of Information (Form LLC-12) with the California Secretary of State. The revised Statement of Information will list the name and address of the new agent for service of process. The agent’s address cannot be a Post Office box. FYI: Some people call the agent for service of process the CA LLC’s resident agent.
Question: If a California LLC distributes all of its assets to its members and dissolves without paying a creditor, can the creditor collect the unpaid debt from the former members?
Answer: Yes, but only to the extent of the value the member received. The California Court of Appeals case of CB Richard Ellis, Inc. v. Terra Nostra Consultants, 178 Cal.Rptr.3d 640 (Cal. Ct. App. Oct. 7, 2014) confirmed this concept.
Jefferson 38, LLC, a California limited liability company, signed a listing agreement in 2004 with real estate broker CB Richard Ellis, Inc. (“CBRE”) to sell its land. The LLC sold it land for $11,800,000, but CBRE was not paid anything. In 2006 CBRE exercised a clause in the listing agreement to arbitrate the dispute over the commission. CBRE won an arbitration award of $960,649.30. The arbitration award was confirmed and judgment entered in the amount of $985,439.80 by the Los Angeles Superior Court. The judgment was affirmed on appeal.
When the real estate was sold in 2005, the net proceeds of the sale were distributed to the members of the LLC shortly thereafter and the LLC ceased to engage in business. On February 27, 2006, Jefferson 38, LLC, filed a certificate of cancellation with the California Secretary of State indicating that all of its members voted for the dissolution.
At this point in time the members of the LLC had caused the LLC to distribute all of the LLC’s assets to its members and legally dissolved the LLC while an outstanding claim was pending. This is a scenario California LLC law attempts to prevent and that is disfavored by the courts.
Because the events that gave rise to this case occurred before January 1, 2014, the effective date of the California Revised Uniform LLC Act, the California Court of Appeals applied prior California LLC law to the case. Former Section 17355(a)(1) provided:
“Causes of action against a dissolved limited liability company, whether arising before or after the dissolution of the limited liability company, may be enforced against any of the following:
(A) Against the dissolved limited liability company, to the extent of its undistributed assets. . . .
(B) If any of the assets of the dissolved limited liability company have been distributed to members, against members of the dissolved limited liability company to the extent of the limited liability company assets distributed to them upon dissolution of the limited liability company.”
The defendants argued that they should not be liable for the debt owed by the LLC to CBRE because they were paid long before the actual dissolution of the LLC. The Court of Appeals rejected this argument because if that were the law LLC members could easily distribute assets to members rather than creditors and avoid personal liability simply by making the distributions long before the technical dissolution of the LLC.
Current California LLC law with respect to California LLCs making distributions to members is stated in Cal. Corp. Code § 17704.05, which states:
(a) A limited liability company shall not make a distribution if after the distribution either of the following applies:
(1) The limited liability company would not be able to pay its debts as they become due in the ordinary course of the limited liability company’s activities.
(2) The limited liability company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the limited liability company were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of members whose preferential rights are superior to those of persons receiving the distribution.
Warning to Members of California LLCs: Do not clean out your LLC’s assets and leave any unpaid creditors. The general rule of prior and current LLC law that members of a California LLC are not liable for the debts, obligations, or other liabilities of the limited liability company does not apply when the members are paid before the LLC’s creditors.
Question: What are the rules / statutory requirements for naming a new California limited liability company?
Answer: The name of a CA LLC:
(1) must not be a name that is “likely to mislead the public” and must be distinguishable in the records of the California Secretary of State from the name of an existing LLC or an LLC name that has been reserved by another party. Note: Names are not considered distinguishable if the only difference is a limited liability company ending;
(2) must include the words Limited Liability Company, or the abbreviations LLC or L.L.C. The words Limited and Company may be abbreviated to Ltd. and Co., respectively;
(3) may not contain the words bank, trust, trustee, incorporated, inc., corporation, or corp.; and
(4) must not contain the words insurer or insurance company or any other words suggesting that it is in the business of issuing policies of insurance and assuming insurance risks.
If the Articles of Organization for a new LLC has a name that does not satisfy all of the above CA LLC naming requirements the California Secretary of State will reject the Articles of Organization.
See California Corporations Code Section 17701.08 and 17708.05. An LLC name is reserved pursuant to California Corporations Code Section 17701.09 using the Secretary of State’s Name Reservation form.
Question: Should I form a California LLC or a California corporation?
Answer: The California limited liability company is usually a better entity than the California corporation or limited partnership. The LLC is a hybrid of the corporation and the limited partnership. Years ago some lawyers who understood that the corporation and the LP each had some bad characteristics created a new type of entity that took only the best characteristics of the corporation and LP and added those characteristics into the new type of entity called the limited liability company.
The California LLC has fewer formalities than the California corporation. For example, California corporations must hold annual meetings of shareholders and and directors and the meetings should be documented with minutes. California LLC law does not require the members or managers of a California LLC to have annual meetings.
If somebody says you should not form a California LLC because California LLCs pay more California state taxes that California LLCs disregard that statement. Yes, there can be a difference is California state taxes paid by an entity taxed as a corporation vs. an entity taxed as a sole proprietorship or a partnership. A California LLC can be taxed one of the following four ways for federal income tax purposes:
Thus, if the amount of income your entity will generate is a California state tax issue, then you can have your California LLC taxed as a C corporation or an S corporation (if eligible) to get California corporate tax treatment or as a sole proprietorship or partnership to get non-corporate California state tax treatment.
Administrative dissolution of an LLC occurs when an LLC fails to follow the state’s requirements, resulting in the state agency penalizing or dissolving the LLC. In California, these requirements include payment of the annual tax and fee, in addition to filing the initial and biennial Statement of Information. When an administrative dissolution occurs, the LLC must act in a timely manner to correct the deficiency.
There are many instances when an LLC is administratively dissolved, yet it continues to operate. This often occurs when the LLC is not aware of the administrative dissolution. An issue then arises as to who is liable for acts when an administratively dissolved LLC enters into a contract and subsequently is unable to pay or perform. This issue was dealt with in Pannell v. Shannon, when a single-member Kentucky LLC was dissolved, but continued to enter into a lease agreement. When the dissolved LLC defaulted on the lease, the other party sued not only the dissolved LLC, but also the single member. The LLC responded by immediately taking steps for reinstatement, which was granted by the Kentucky Secretary of State. Still, the issue remained whether or not the single member was personally liable.
The Supreme Court of Kentucky affirmed the lower courts’ decision in holding that the member was not personally liable for the administratively dissolved LLC’s lease. By relying on the Kentucky LLC Act, the court determined that since the reinstatement related back to the date of the dissolution, the LLC was essentially never dissolved in the first place. The court emphasized the absurdity of limiting an unintentionally dissolved LLC to only winding-up activities. This limit on activities, if taken literally, would prevent the LLC from filing the necessary paperwork to be reinstated. Also, the court highlighted the purpose of the LLC Act: to limit personal liability. A missed LLC fee or tax payment does not justify disregarding the most important principle behind why people form LLCs.
The opinion reveals that despite a complicated scenario, an understanding of the basic reason behind a limited liability company is not to be ignored: An LLC is meant to protect owners and members from personal liability. The opinion also shows that the normal requirements for a winding-up LLC do not apply for LLCs which are unintentionally dissolved. By protecting managers and remembering the purpose of an LLC, this ruling should be regarded as a victory.
Question: My limited liability company was not formed in California, but it has a an employee who lives in California. I understand that if a foreign LLC has an employee or office in California the foreign limited liability company must register to do business in California. How do I register a foreign LLC to do business in California.
Answer: An LLC formed outside California that does business in California must register to do business in California by filing an Application to Register (Form LLC-5).
When is an LLC Formed Outside CA Doing Business in California?
To learn more about when a foreign LLC must register to do business in California read my articles called “Warning for Non-California LLCs that Have Members, Managers or Agents in California” and “California’s LLC Law Lists Events that Do Not Cause a Foreign LLC to Do Business in CA.”
Question: Does California law require California LLCs to have an actual office in California?
Answer: Yes. California Corporations Code Section 17701.13(a) states: “A limited liability company shall designate and continuously maintain in this state . . . An office, which need not be a place of its activity in this state.”
Question: What records does California LLC law require a California LLC to maintain in its office?
Answer: California LLCs must continuously maintain certain records in its office in California that the LLC must designate and maintain pursuant to California Corporations Code Section 17701.13(a). All California LLCs must comply with California Corporations Code Section Section 17701.13(a), which states:
Each limited liability company shall maintain in writing or in any other form capable of being converted into clearly legible tangible form at the office referred to in subdivision (a) all of the following:
(1) A current list of the full name and last known business or residence address of each member and of each holder of a transferable interest in the limited liability company set forth in alphabetical order, together with the contribution and the share in profits and losses of each member and holder of a transferable interest.
(2) If the limited liability company is a manager-managed limited liability company, a current list of the full name and business or residence address of each manager.
(3) A copy of the articles of organization and all amendments thereto, together with any powers of attorney pursuant to which the articles of organization or any amendments thereto were executed.
(4) Copies of the limited liability company’s federal, state, and local income tax or information returns and reports, if any, for the six most recent fiscal years.
(5) A copy of the limited liability company’s operating agreement, if in writing, and any amendments thereto, together with any powers of attorney pursuant to which any written operating agreement or any amendments thereto were executed.
(6) Copies of the financial statement of the limited liability company, if any, for the six most recent fiscal years.
(7) The books and records of the limited liability company as they relate to the internal affairs of the limited liability company for at least the current and past four fiscal years.
A California LLC that fails to maintain all of the required records at its designated California office has one strike against it if a court is ever asked to pierce the company veil and hold the the owners/members liable for the debts of the LLC.
Take care when you sign a contract on behalf of your LLC that you do not sign in a way that makes you liable as a party to the contract. California LLC law contains the general rule that a California LLC that signs a contract is liable for the obligations created under the contract, not its members. There is a big exception to the general rule. If you will be signing contracts for a California LLC ignorance of how to sign the contract could cost you big bucks.
The Maryland case of Ubom v. Suntrust Bank, involved a a lawyer who obtained a line of credit for his LLC. The member of the LLC signed a loan agreement that included language about a personal guaranty. The member put his personal information such as his social security number and personal address in the guaranty section of the contract, but he did not put anything in the space that asked for the “Legal Name of the Guarantor.”
The loan agreement had a signature line for the “applicant” and a second signature line for the “guarantor.” Mr. Ubom signed one each lien and wrote “Managing Attorney” after his signature. The LLC defaulted on the loan and the lender sued the LLC and Mr. Ubom.
The lender claimed that Mr. Ubom was personally liable as a guarantor because language in the loan agreement stated that he guaranteed the loan. The loan agreement said:
To induce Bank to open the Account and extend credit to the applicant, or to renew or extend such other credit, each of the individuals signing this Application as a “Guarantor” (whether one or more, the “Guarantor”) hereby jointly and severally guarantee payment to Bank of all obligations and liabilities of the applicant of any nature whatsoever and whether currently existing or hereafter arising, including without limitation, all obligations and liabilities under this Application and/or the Account, and reasonable fees and expenses of Bank’s attorney(s) incurred in the collection of such obligations (collectively the “Obligations”).
The court said that based on the language quoted above Ubom agreed to guaranty the debt. The court said it did not matter that Ubom did not put his name in the on the “Legal Name of the Guarantor” line.
Before you sign a contract on behalf of your LLC you must carefully read the contract and make sure it does not contain any language that would obligate you as the signer. If you are not sure that signing a contract for your LLC will not cause you to incur liability ask your attorney to review the contract.
Question: My LLC was formed in a state outside California. The foreign LLC has an employee who lives in California, but it is not registered with the California Secretary of State to do business in California. Is the foreign LLC subject to California’s Revised Uniform Limited Liability Company Act (the “New LL Act”) effective January 1, 2014?
Answer: Probably, but not because of any provision in the New LLC Law. California RULLCA Section 17713.04(a) provides the California’s Revised Uniform Limited Liability Company Act applies to all CA LLCs that exist after December 31, 2013, and all foreign LLCs that were registered with the California Secretary of State: (i) before January 1, 2014, and (ii) after December 31, 2013.
It’s odd that Section 17713.04(a) does not state that the New LLC Law applies to foreign LLCs that do business in California and that did not register to do business with the California Secretary of State.
The New LLC Law does expressly state that the law of the state in which an LLC is formed governs:
Managers’ liability as a manager of the foreign LLC for the LLC’s liabilities, obligations and debts.
Florida’s Fourth District Court of Appeals recently published an important LLC opinion in Young v. Levy. The issue in this case was whether a writ of garnishment could be used against distributions by the limited liability company. Specifically, this case interpreted “exclusive remedy” within the charging order provisions to decide the outcome. This opinion is not only relevant to Florida LLC members and managers, but also to the LLC members and managers in 15 states that have similar charging order “exclusive remedy” language in their state’s LLC statutes. FYI: California LLC law is not one of the states that has the charging as the exclusive remedy for a creditor who gets a judgment against a member of a California LLC. It is undetermined if other states will follow in Florida’s footsteps, but an understanding of the Young v. Levy decision would benefit LLCs who are looking to determine what remedies are available in a cases similar to Young v. Levy.
In this case, Levy owned 51% of the LLC, while Young owned the other 49%. Due to business-management differences, Levy removed Young from the business. This led Young to sue Levy for injunctive relief and damages. Initially, the trial court granted Young’s requests. However, Levy soon after filed a motion to dissolve the injunction, which was granted. Then Levy moved for damages regarding attorneys’ fees. These fees were awarded to Levy, totaling $41,409.45.
To obtain this money, Levy looked to use a writ of garnishment on distributions by the LLC. The garnishee (LLC) owed over $44,000 to Young. Young claimed that he was exempt from the garnishment, while Levy filed objections, stating that the garnishment was proper. This was the key issue analyzed by Florida’s Fourth District Court of Appeals.
Young asserted that the language in Section 608.433 (5) in Florida Statues (2011) did not allow garnishments as a proper remedy. This section states:
“Except as provided in subsections (6) and (7), a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s assignee may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions from the limited liability company.”
Levy argued that the distributions owed to Young were “profits” or “dividends”; and thus, a writ of garnishment would be an acceptable remedy. The Fourth District Court of Appeals did not accept this argument, because the term “interest” is defined as share of profits and the right to receive distributions. This led the court to hold that a garnishment of distributions is not a proper remedy to satisfy judgment. The court reiterated the importance of the plain language of Florida Statues which emphasized that “
The interpretation of “exclusive remedy” only allows plaintiffs to obtain charging orders on the members’ distributions by the LLC. Plaintiffs cannot obtain a garnishment on these distributions. As stated earlier, a similar “exclusive remedy” provision exists in 15 states, besides Florida. If these other states rule similarly, it will be more difficult for the LLC to collect judgment from a member.
Some states require that a limited liability company (LLC) have at least two members. Many states, including California, allow for single member LLCs. Another jurisdiction that permits a single member LLC is Alabama. The LLC law of California and Alabama provide that when the single member dies, the LLC must be dissolved, subject to two exceptions. First, the single member LLC can continue if the operating agreement provides for the continuation and a method for determining the successor(s) to the deceased member. Second, the LLC can continue if the assignee(s) of the interest of the deceased members elect to continue the business within 90 days of the death. Recently, in L.B. Whitfield III, Family LLC v. Whitfield, the Supreme Court of Alabama dealt with the dissolution of the single member LLC.
In this case, the single member of an Alabama LLC died, and left his interest in the LLC to his four children. There was no vote to continue the LLC, and no special provisions in the operating agreement. Still, the children operated the business for 10 years after their father’s death. The four children began to have business disputes and one child (the manager) filed a lawsuit against the other three children. The three defendants discovered the Alabama law that dissolves a single member LLC unless the majority of the heirs agree to continue the business within 90 days. The three children then sued for a court order that the LLC distribute its assets to the members because the LLC was statutorily dissolved 90 days after the father’s death.
Despite the defenses offered by the plaintiff, the court held that the three children were correct, and that the LLC was dissolved when the children failed to continue the business within 90 days after the father’s death. The Supreme Court of Alabama said it did not matter that the LLC continued to operate for 10 years. The court highlighted that the fundamental principles of an LLC include membership admission through a written agreement that is signed. Since this new agreement was never established, the LLC was dissolved.
Caution: If a California resident dies his or her membership interest may be subject to an expensive and time-consuming California probate. To learn about nasty California probates and how to avoid a California probate and save your loved ones mega-bucks read “Trusts Should Own Valuable LLCs to Avoid Probate.”
For more on this topic see “What Happens If the Sole Member of a CA LLC Dies?“
Question: My California limited liability company moved so it is now located at an address that is different from the address stated in the Articles of Organization filed with the California Secretary of State. Does my California LLC have to notify the California Secretary of State of the address change?
Answer: Yes. A member or manager of the California LLC should notify the California Secretary of State of the address change by filing a revised Statement of Information (Form LLC-12) with the California Secretary of State.
Question: Do California LLCs have to file their Operating Agreement with the California Secretary of State?
Answer: No. California LLC law does not require a California LLC to have an Operating Agreement. Nor does the law require California LLCs that have an Operating Agreement to file the Operating Agreement with the California Secretary of State. If a California LLC attempted to file its Operating Agreement with the California Secretary of State it would be rejected.
California’s Revised Uniform Limited Liability Company Act Section 17708-03(b) expressly states that none of the following activities of an LLC formed outside California do not constitute doing business in California:
1. Suing or defending a lawsuit, being a party of an arbitration or an or an administrative proceeding or settling a dispute or claim.
2. Conducting internal affairs activities such as holding meetings of managers or members.
3. Having a bank account or investment account in a California institution.
4. Having an office or agency in California for the purpose of transferring, exchanging and registering the LLC’s securities.
5. Selling products or services using independent contractors located in California.
6. Soliciting orders from customers inside California by electronic methods, by mail, by agents or employees if the order must be accepted outside California before the order become a legally binding contract.
7. Incurring a debt, acquiring a debt or evidence of indebtedness or obtaining a lien, security interest or mortgage in personal property or real property.
8. Collecting a debt, enforcing a lien or mortgage and holding property acquired from a foreclosure.
9. Consummating a one-time transaction within 180 days that is not part of a series of transactions of a similar nature.
10. Engaging in interstate commerce business.
California RULLCA Section 17708-03(d) states that you are not transacting business in California merely because you are a member or manager of a California limited liability company or a foreign LLC that is registered to do business in California.
Question: I am a not a U.S. citizen and I live outside the U.S., aka a “nonresident alien.” I formed a limited liability company in the U.S. How do I get a federal employer id number (EIN) for my LLC?
Answer: You can get the EIN one of two ways: the easy way or the not so easy way. Before January of 2014 we could get an EIN for an LLC we formed for a nonresident alien if the nonresident alien completed and signed an IRS form SS-4 that designated my legal assistant as a third party designee authorized to contact the IRS and get the EIN. My legal assistant would call the IRS international EIN number, fax the SS-4 to the IRS agent and spend about 45 minutes on the phone, but at the end of the call the IRS would give my legal assistant the EIN.
Beginning in January of 2014, the IRS canned that procedure. Now a company of any type owned by a nonresident alien gets an EIN for the company by one of the following two methods:
You should be able to get the EIN for the new LLC by using the IRS’
online wizard here:
Easy Way: If the nonresident alien has an IRS issued International Taxpayer Identification Number (ITIN), the nonrsident alien can obtain the EIN in a 5 – 10 minute data entry session using the IRS’ online EIN wizard. After submitting all of the information the website will display the EIN. Be sure to print the page with the EIN and keep it in a safe place.
Hard Way: If the nonresident alien does not have an ITIN then he or she must complete and sign an IRS form SS-4 and fax or mail it to the IRS. Faxing the SS-4 to the IRS is the better method because the IRS will fax the EIN to the applicant in approximately four business days vs. three to four weeks if the SS-4 is mailed to the IRS. Prepare, sign and fax the IRS form SS-4 to the IRS at 859-669-5760.
To get a partially completed IRS form SS-4 for an LLC and my detailed instructions on how to fill out the form read my article called “How to Complete IRS Form SS-4.” Be sure to delete all the text at the bottom of the form in the Third Party Designee Fields and insert your name, phone number and fax number at the bottom of the form.
Question: I am the sole member of my California limited liability company. I am not married and have two children. What happens to my California LLC if I were to die?
Answer: California RULLCA Section 17704.01 provides:
A limited liability company is dissolved, and its activities shall be wound up, upon . . . The passage of 90 consecutive days during which the limited liability company has no members, except on the death of a natural person who is the sole member of a limited liability company, the status of the member, including a membership interest, may pass to the heirs, successors, and assigns of the member by will or applicable law.
Based on this statute the good news is that the single member CA LLC does not automatically dissolve if the membership interest of the deceased sole member is inherited by the heirs of the deceased by a Will or the law of intestate succession. If the deceased member has a valid Will then the membership interest will pass to the heir(s) named in the Will. If there is no Will then the membership interest will go to the heirs according to the law of intestate succession of the state in which the deceased member resided at the time of death.
Warning: The membership interest of a deceased member who was a California resident may have to go through an expensive and lengthy California probate. To learn about the costs of a California probate and how to save your family thousands of dollars by avoiding a California probate read “Trusts Should Own Valuable LLCs to Avoid Probate.”
In this article Gianfranco Pietrafesa states “The full title to this article should be ‘prescribing standards to measure performance of the contractual obligation of good faith and fair dealing under the New Jersey Revised Uniform Limited Liability Company Act.’ . . . The New Jersey Revised Uniform Limited Liability Company Act (NJ-RULLCA) includes a contractual obligation of good faith and fair dealing . . . . An LLC operating agreement may not eliminate the contractual obligation of good faith and fair dealing.”
The new California Revised Limited Liability Company Act contains a similar provision. People who are drafting Operating Agreements for California LLCs should read this article.