Types of LLCs and Steps to LLC Formation

Only one person is necessary to organize a California LLC and he/she need not be a member or manager. The California Secretary of State furnishes Form LLC-1 which must be used for the Articles of Organization. The Articles may contain additional provisions including, but not limited to, limitations and restrictions on the business in which the LLC engages, admission of members, powers that may be exercise, events causing a dissolution, or limitations on the authority of managers or members and the name of the initial managers. The filing fee for the LLC-1 is $70.00. The name must include the following: “limited liability company”, “L.L.C.” or “LLC.” The words “limited” and “company” may be abbreviated as “LTD. and “Co.” respectively.

A LLC may be set up to engage in any lawful business activity, “except the banking, insurance or trust company business.” However, the use of a LLC for the practice of licensed professions and occupations is generally prohibited.

The Beverly-Killea Limited Liability Company Act which governs LLCs (the “Act”) in California does not require that the “Operating Agreement” be in writing, but it obviously should be. An Operating Agreement is similar to a partnership agreement in that it covers generally the same types of provisions. The following provisions of the Act can only be varied by the Articles or a written Operating Agreement:

  1. Vesting of power only in members to adopt, alter, amend or repeal the Operating Agreement.
  2. Voting rights of members.
  3. Actions requiring majority or unanimous vote.
  4. Location of meetings, calling of meeting adjournment, actions, participation, proxies, quorum, and determination of members of record.
  5. Election, removal, resignation and expiration of term of manager.
  6. Appointment and removal of officers.
  7. Provision for indemnification except for breach of fiduciary duty of manager.
  8. Fiduciary duties of manager with informed written consent of members. how to register a DBA in Texas

The Articles and Operating Agreement cannot do any of the following:

  1. Vary statutory definitions.
  2. Eliminate a right of a member to assert that termination of his interest and return of contribution was unreasonable.
  3. Allow amendment of Articles by less than a majority in interest.
  4. Abridge right of a member to vote on dissolution or merger.
  5. Deny rights of a member or a holder of an economic interest or limited liability company to information and inspection of required records.
  6. Change requirements for formation.
  7. Change provisions concerning dissolution.
  8. Change provisions concerning class of derivative actions.
  9. Change rights of dissenting members to a reorganization.
  10. Change the rights of a member obligated to provide services to the LLC to withdraw without prejudice to contract rights of the LLC.

If the LLC has managers, the LLC-1 should so state, but the number (unless only one) and names are not needed for the LLC-1. Managers may be removed without cause by a vote of majority in interests. However, the Articles or Operating Agreement may eliminate or modify the right of members to remove managers. A member managed LLC is more like a typical general partnership, because each member has a vote and, perhaps, even a veto with respect to the management and control of the company business. A manager managed LLC is more like a limited partnership where the general partner (manager) manages the company and the limited partners (other members) are more like passive investors.

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