When forming your California corporate entity, you have many options including forming a California corporation or creating a California limited liability company (” California LLC”). Most people are familiar with the idea of how California corporations work and how they are organized. But what about California LLCs?

Here are a few of the basic differences between California corporations and California LLCs.

California Corporation and California LLC Differences

California corporations and California LLCs are organized differently. A California corporation has shareholders, articles of incorporation, bylaws, and a board of directors that govern how the company is run. The board meets regularly and appoints the President/CEO, Secretary, and Treasurer/CFO (and sometimes other upper-level managerial employees). The highest-level employee is the President or the CEO. The corporate bylaws set out the officers of the company, their titles, and their duties. Typically, the President/CEO runs the day-to-day operations, hires lower-level employees, signs contracts, etc., with the board of directors serving an oversight role.

Broadly speaking, a California corporation can engage in almost any type of business and almost anyone can be a shareholder of a corporation (except for California professional corporations, which restrict share ownership to professionals with specific licenses and California corporations electing Subchapter S taxation, which has limitations on citizenship and residency).

By contrast, a California LLC has members, articles of organization, an operating agreement, and no board of directors. In California, you can create one of three types of LLCs:

• Single-member LLC — member managed
• A multiple member LLC managed by one or more of its members
• A multiple member LLC managed by some third person hired to manage the LLC

For a California LLC, typically, the person running the business is called the “Managing Member” (also sometimes called the “General Manager”). The operating agreement sets out the duties and responsibilities of the Managing Member. Typically, like a President/CEO, the Managing Member runs the day-to-day operations, hires lower-level employees, signs contracts, etc. The specific duties and any limitations on what the Managing Member can do are set out in the operating agreement. Oversight is accomplished by the members of the California LLC directly with meetings and rights and obligations set forth in the operating agreement. What is legally allowed in an operating agreement is substantially different than what is legally allowed in articles of incorporation and corporate bylaws.

The type of business that can be run via a California LLC and membership in a California LLC is limited in many ways. For example, certain professions (like doctors, dentists, attorneys, and other professionals who must use professional corporations instead of general stock corporations) cannot form a California LLC to run their professional practices. 

California Corporation and California LLC Similarities

Both California corporations and California LLCs are created by filing papers with and paying a fee to the California Secretary of State. Both must file tax returns with and pay annual taxes with the California Franchise Tax Board. Both must comply with federal, state, and local laws with respect to permits, registrations, compliance with regulations, compliance with employment laws, etc. As long they remain in good standing, both can exercise all the powers allowed under California law such as:

• Enter into contracts;
• Borrow money;
• Own real property; and
• Prosecute and defend lawsuits

As for the individuals running the businesses, whether a President/CEO or a Managing Member, those individuals owe obligations to the shareholders or members. Those obligations include the duty:

• Of good faith;
• Of loyalty;
• To run the business using the level of care as would be used by an ordinarily prudent person in a like position under similar circumstances; and
• The run the business a manner believed to be in the best interests of the company/LLC

Call San Diego Corporate Law Today

Every new business is unique. Whether a corporation or an LLC is the better corporate structure for you depends on the circumstances and the specific goals you want to achieve. an experienced corporate attorney like Michael J. Leonard, Esq., of San Diego Corporate Law, can provide guidance, advice, and all the related legal services to successfully and properly form your California corporation or California LLC. Mr. Leonard has been named a “Rising Star” for 2015, 2016 and 2017 by SuperLawyers.com. Contact Mr. Leonard by email or by calling 858.483.9200.

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