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The Duty of Care for a Corporation Versus a Limited Liability Company
There are many reasons why you might want to form a San Diego limited liability company instead of forming a San Diego corporation. Among those include:
- LLCs require fewer corporate formalities like annual shareholder meetings, etc.
- LLCs have automatic “pass-through” tax status
- LLCs can easily make special and different profit allocations for different members — C corporations can only do this with different classes of stock and S corporation cannot have more than one class of stock
- No ownership restrictions for an LLC with respect to number and/or foreign status
- Noncompete agreements are enforceable against departing members — see Corp. Code, § 16602.5
- Members of an LLC can deduct operating losses; C corporation shareholders cannot
In addition to these, there are statutory differences with respect to the duty of care that is owed by the directors of a corporation versus the managers of an LLC. In summary, under the “default” provisions of the two statutes, a director can be held personally liable for negligence whereas a manager of an LLC can be held personally liable only for acts that are grossly negligent, reckless, intentional, or knowing violations of law. Note that the “default” positions can be changed. See Cal. Corp. Code, §§ 204 and 204.5. A good San Diego corporate attorney can provide advice and counsel as to whether an LLC is more advantageous than a corporation and can also assist with changing the default positions. Below is a quick discussion of the statutory differences.
San Diego Corporation Law: Fiduciary Duties Owed by Directors and Managers
In San Diego and California, directors of corporations owe fiduciary duties to the shareholders and, similarly, managers of an LLC owe fiduciary duties to the members/owners. In general, for both directors and managers, there are two duties – the duty of loyalty and the duty of care. The duty of loyalty is the essentially the same for both: Directors and managers must act in the best interest of the corporation/LLC and they are prohibited from engaging in self-dealing or diverting what are called “corporate opportunities” to themselves or others.
San Diego Corporate Law: Different Duties of Care
The duty of care, on the other hand, is not the same for California corporations and LLCs. In general, the duty of care requires directors and LLC managers exercise “care” in carrying out their duties. However, for a director of a corporation, the duty of care is a lower standard. California Corporation Code, § 309(a) states in pertinent part: “A director shall perform the duties of a director … in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” Under standard statutory construction, the “ordinarily prudent person” language creates a negligence standard of liability.
By contrast, under § 17704.09 the California Uniform Limited Liability Act, for a manager of an LLC, the duty of care is a higher “grossly negligent” standard. In pertinent part, subsection (c) reads:
“A member’s duty of care to a limited liability company and the other members in the conduct … of the limited liability company is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.”
Contact San Diego Corporate Law Today
If you would like more information about corporations and/or LLCs, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” three years running by SuperLawyers.com. Mr. Leonard has the experience to help you form a corporation or an LLC (or any other corporate entity) including custom drafting bylaws or an operating agreement suited to the specific and unique needs of your business. Every business needs a good business attorney. Mr. Leonard can be reached at (858) 483-9200 or via email.
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