How to Change the Agent for Service of Process of a California LLC

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.

By |2015-02-25T20:00:47-07:00November 21st, 2014|Categories: FAQs, Operating LLCs|0 Comments

Creditor of California LLC Wins Judgment Against LLC Members

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.

By |2016-12-13T21:20:14-07:00October 26th, 2014|Categories: Asset Protection, CA Law, CA LLC Statutes, FAQs, Lawsuits|0 Comments

California LLC Naming Rules

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.

California LLC or California Corporation?

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:

  • a sole proprietorship if the LLC has one owner or two owners who own their interests in the LLC as community property.
  • a partnership if the LLC has more than one owner.
  • a C corporation.
  • an S corporation if it satisfies all eligibility  requirements.

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.

By |2015-02-19T22:17:33-07:00October 6th, 2014|Categories: CA LLC Formation, FAQs, LLCs & Corporations|0 Comments

How to Register an LLC to Do Business in California

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.”

By |2015-04-12T08:54:36-07:00September 21st, 2014|Categories: FAQs, How Do I, Operating LLCs|0 Comments

Records a California LLC Must Maintain in Its Office

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.

By |2014-08-12T20:37:15-07:00August 11th, 2014|Categories: CA LLC Statutes, FAQs, Operating LLCs|0 Comments

Are Foreign LLCs that Don’t Register to Do Business in CA Subject to CA’s LLC Law?

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:

  • The foreign LLC’s organization, internal affairs and members’ and managers’ authority.
  • Members’ liability as a member of the foreign LLC for the LLC’s liabilities, obligations and debts.

Managers’ liability as a manager of the foreign LLC for the LLC’s liabilities, obligations and debts.

 

By |2015-04-12T08:55:19-07:00July 21st, 2014|Categories: FAQs, Operating LLCs|0 Comments

How Does a California LLC Change Its Address with the California Secretary of State?

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.

By |2015-02-25T20:01:32-07:00June 21st, 2014|Categories: FAQs, Operating LLCs|0 Comments

Operating Agreement Filed with 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.

By |2015-02-25T20:02:23-07:00June 19th, 2014|Categories: California Secretary of State, FAQs, Operating Agreements|0 Comments

New IRS Procedure to Get EIN for an LLC Owned by a Nonresident Alien

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.

By |2017-10-05T10:38:16-07:00June 5th, 2014|Categories: CA LLC Formation, FAQs, How Do I, Tax Issues|0 Comments

What Happens If the Sole Member of a CA LLC Dies?

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.”

By |2016-12-13T21:20:15-07:00June 2nd, 2014|Categories: FAQs, Operating LLCs|0 Comments

California LLC Seal Scam

Question:  My friend hired a document preparer to form his California LLC.  While reviewing the LLC binder I saw that it contained an LLC seal, a device that makes a raised imprint on paper that the LLC’s name.  Does a California LLC need a seal?

Answer:  No.  California LLC law does not require California LLCs to have a seal.  No business, vendor or independent contractor will ask for your LLC’s seal on a document.   The only purpose of the LLC seal is to allow a document preparer to make a prospective LLC purchaser think the document preparer is giving the purchaser something of value.

By |2015-02-19T22:32:20-07:00May 19th, 2014|Categories: FAQs, Formation Issues|0 Comments

California LLC’s Fictitious Business Name

Question:  How does my California LLC get a dba also known as a fictitious name?

Answer:  If your California LLC wants to protect a fictitious business name it must prepare and file the appropriate form with the county in which  the LLC’s principal place of business is located.  To get the form go to the website of the appropriate county.

By |2019-03-17T14:39:52-07:00March 19th, 2014|Categories: FAQs, Operating LLCs|0 Comments

Do I Need to Reserve a Name for My New California LLC?

Question:  I intend to file Articles of Organization with the California Secretary of State to create a new California LLC.  Should I reserve the LLC’s name with the California Secretary of State?

Answer:  Almost always no because:

  • If the name is available for the LLC it has been available from the beginning of time up to the moment the California Secretary of State grants the reservation.
  • The fact the California Secretary of State reserves the name of a to be formed LLC does not mean the name can actually be used by the to be formed LLC.  Although nobody else can use the reserved name for a California entity while the reservation is active you won’t know if the Secretary of State will actually allow the LLC to be formed with the name until you file the Articles of Organization and the Secretary of State approves it.
  • The reservation is expires after 60 days.
  • Its a waste of $10.

If you do want to reserve a name for your new California limited liability company just follow the instructions on and file the California Secretary of State’s Name Reservation Request form.

By |2015-02-19T20:43:40-07:00February 25th, 2014|Categories: CA LLC Formation, FAQs|0 Comments

Can a California LLC Have Officers Such as a President?

Question: Can an California limited liability company have a President, Vice President, Chief Executive Officer or personnel with other titles?

Answer: Yes. California Revised Uniform Limited Liability Company Act Section 17704-07(v) provides that California LLCs can have officers such as a President, Vice President, Secretary, Treasurer, CEO or CFO if officers are authorized in the LLC’s Operating Agreement.  If there is no Operating Agreement or the Operating Agreement is silent as to officers and the LLC is manager managed, the managers can appoint officers.

California Revised Uniform Limited Liability Company Act Section 17704-07(w) states that a contract signed by a California LLC’s President, Vice President, Secretary, Treasurer, chair person of the Board or Chief Financial Officer is not invalid unless the act is prohibited in the LLC’s Articles of Organization or the other party to the contract knows the LLC’s officer does not have the authority to sign the contract.

If your LLC will have people serve as President or CEO the LLC’s Operating Agreement should contain provisions that create the positions, give names to the positions and describe the duties associated with the position.  FYI:  Our custom Operating Agreement gives you the option to add one or more positions such as President and have appropriate language inserted into the Operating Agreement.

Caution:  If you or your company will enter into a contract with a California LLC you should always ask the LLC to give you a copy of resolutions signed by all the members of the LLC (or the minimum number of members necessary to approve the contract) that authorizes the LLC to enter into the contract.  The resolutions should always specify the name and title of the person who will sign the contract for the LLC.  If the members of World Wide Widgets, LLC, give a copy of such a resolution to you then you will know that Homer Simpson, as President of the LLC, as the power to sign the contract on behalf of the LLC.

See “President of Corporation Personally Liable for Signing Contract.”

By |2016-12-13T21:20:16-07:00February 9th, 2014|Categories: FAQs, LLCs & Corporations, Operating LLCs|0 Comments

How Do I Reserve a Name for a to-be Formed California LLC?

Question: I plan on forming a new California limited liability company in the near future. How do I prevent somebody from taking my desired name before I form the LLC?

Answer: Reserve the desired name with the California Secretary of State. When approved, you will have the exclusive right to use the name for a California LLC for 60 days. Before filing a name reservation you must review the California Secretary of State’s  LLC name rules and then search its business search database for an existing LLC name that is the same or similar to your desired name. If you find a “good” name then file a name reservation on the CSOS’ Name Reservation Request Form.

The California Secretary of State will reject a name reservation if the name is “likely to mislead the public” or not “distinguishable” from an existing LLC name or unexpired name reservation.  The name rules are set forth in California Corporations Code Section 17701.08:

Warning:  Even if you reserve the name the California Secretary of State may reject the Articles of Organization because of the name.

Bottom line:  Review the naming rules and search your desired name on the CSOS’ business search database, but don’t waste the time or money to reserve the name unless your sole purpose is to prevent somebody else from using your desired name.

By |2016-12-13T21:20:16-07:00January 11th, 2014|Categories: CA LLC Formation, FAQs, How Do I|0 Comments

How Do I Check if a Name is Available for a New California LLC?

Question: I want to form a new California LLC. I know that the California Corporation Commission will reject the Articles of Organization if the name of my new LLC is exactly the same as an existing California LLC, corporation, limited partnership or tradename. How do I check the records of the California Secretary of State to see if my desired name is available?

Answer: You must search the California Secretary of State’s business search database to see if you can find a company that is identical or similar to the name you want for your new California limited liability company.  If you find a company that has an identical name then you cannot form a California LLC with that name.  Your desired LLC name must also be distinguishable from existing LLC names and not likely to mislead the public.

Don’t search for a name for your new California LLC without first reviewing the California Secretary of State’s LLC name rules.  California Corporations Code Section 17701.08 contains the following California LLC name rules:

  • The name must end with L.L.C., LLC, Limited Liability Co., Limited Liability Company, Ltd. Liability Co. or Ltd. Liability Company.
  • The name must not include trust, trustee, bank, corporation, corp, incorporated, or inc.
  • The name cannot have insurance company, insurer or any other words suggesting that the LLC  issues insurance policies or assumes insurance risks.
By |2016-12-13T21:20:16-07:00January 10th, 2014|Categories: FAQs, How Do I|0 Comments

Why Form an LLC?

Question: I understand that if I form a limited liability company to operate my business and I am the only person who provides services on behalf of the business that I can be sued and be liable for my acts or omissions that cause harm to third parties. Instead of forming an LLC, can’t I just load up on insurance and not form an LLC to operate my business?

Answer: Yes, but it could be a costly mistake. When you operate a business, commercial insurance is always your first line of defense. Your business should never operate without appropriate insurance coverage. Consult with several experienced business insurance agents and get their advice as to the type of insurance and the coverage amounts that are appropriate for your particular business. Always buy as much insurance as you can afford of the type that is appropriate for your specific type of business.

You operate a business through a limited liability company because it is your second line of defense against things that can go wrong with the business. What if you have insurance and the insurance coverage is denied? What if a plaintiff gets a judgment that exceeds the amount of insurance coverage? If you don’t form an LLC to operate your business and a plaintiff gets a judgment that exceeds the amount of your insurance coverage against you as the owner/defendant, all of your personal assets are at risk and could be lost

Fundamental Fact of Business Life: Without an LLC to operate your business, you are 100% liable for every thing that goes wrong. Do you really want to be in that position and have all of your life savings at risk? It’s hard to predict how liability may arise, but if you operate the business through an LLC, the general rule is the owners are not liable for the debts or obligations of the LLC. Wouldn’t you rather start from the position that you are not liable for anything (except your own acts and omissions) instead of the position that you are liable for everything?

Bottom Line: I believe it is foolish to operate a business without adequate insurance coverage and without operating the business through a limited liability company or a corporation.

By |2016-12-13T21:20:16-07:00January 9th, 2014|Categories: Asset Protection, CA LLC Formation, FAQs, Why People Need an LLC|0 Comments

How Do I Get a Federal Employer Identification Number for an LLC?

Question: I just formed my limited liability company. I know I should get a federal employer identification number (an EIN) for the LLC to open a bank account and to give to 1099 contractors and vendors. How do I get an EIN form my LLC?

Answer: The IRS makes it very easy to get an EIN with its online wizard. In a 5 – 10 data entry session a person connected with the LLC can get the EIN by answering a series of questions posed by the IRS’ website wizard. Apply for an Employer Identification Number (EIN) Online.

By |2016-12-13T21:20:16-07:00January 5th, 2014|Categories: CA LLC Formation, FAQs, How Do I|0 Comments
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