In California, a limited liability company (LLC) is a corporate entity. To form an LLC in California, Articles of Organization must be filed with the California Secretary of State (SOS). Rather than shareholders, a California LLC is owned by members, and rather than shares, a California LLC has membership interest, represented in percentages, which must add up to 100%. An LLC blends the partnership and corporate structures and has fewer formalities than a standard corporation. An LLC can either be member-managed, in which the members themselves manage the business, or manager-managed, in which the members designate who the managers of the LLC will be, and the managers manage the LLC rather than the members. Instead of bylaws, an LLC will be governed by an operating agreement, which will state how the business will be operated. In the absence of an operating agreement, the California Revised Uniform Limited Liability Company Act (RULLCA) will govern. It is important that LLC members and managers become familiar with the RULLCA and make sure that the operating agreement and articles of organization are compliant with its statutes.

Each year, every LLC that is doing business or organized in California must pay an annual tax of $800.00. This yearly tax will be due, even if you are not conducting business, until you cancel your LLC. You will have until the 15^th day of the 4^th month from the date you file with the California Secretary of State to pay your first-year annual tax.

An LLC will be either:

• a disregarded entity (for federal tax purposes) if it has only one member,
• a partnership, if it has more than one owner
  • Limited liability partnership
  • Limited liability limited partnership
  • Series limited liability company
• An LLC being taxed as a corporation.

Please note than an LLC must have the same classification for both California and federal tax purposes. An LLC may elect S-Corporation status (if it qualifies), by filing a Form 8832, Entity Classification Election, classifying it as a C-Corporation for tax purposes, and then filing a Form 2553, Election by a Small Business Corporation with the IRS. Otherwise, an LLC in California is taxed, by default, as a pass-through. What that means is each member of a California LLC is taxed for profits as an individual. The IRS does not tax LLC profits at the corporate level, and again after they are distributed to members. Instead, members report losses and gains on personal tax returns and pay the IRS any money owed.

If the members take care not to commingle their personal assets with those of their LLC, and follow the corporate formalities required of maintaining an LLC, the LLC will protect its members against personal liabilities.

Please note: in California, professional companies (ex. law firms, CPA firms, medical practices) cannot be LLCs. They must be incorporated as professional corporations.

A C-Corporation is a corporate entity that generally pays its taxes annually on its earnings (unless it decides to be taxed as an S-Corporation). A C-Corporation must create bylaws, that include provisions regarding shareholder meetings, director meetings, and the number of officers and their responsibilities. A C-Corporation can be incorporated in California by filing Articles of Incorporation with the California Secretary of State. If properly maintained and its corporate formalities observed, the owners of the corporation will not be liable for the losses of the business, and creditors generally may only look to the corporation and the business assets for payment. A C-Corporation, unlike an LLC, has shareholders, not members. While the owners have ultimate control of the corporation, they must elect directors, who then elect officers for the company. The directors make the big decisions, while the officers make the day-to-day decisions. A corporation can engage in business and enter contracts, and can initiate lawsuits and be sued. If it is sued, just like an LLC, it must be represented by an attorney in court. It cannot represent itself. A C-Corporation must pay, at a minimum, the franchise tax of $800.00 annually, however newly incorporated corporations are not required to pay the minimum franchise tax in their first year.

An S-Corporation, for the United States federal income tax purposes, is a closely held corporation (or, in some cases, a limited liability company or a partnership) that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S-Corporations do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. An S-Corporation must only have shareholders that are individuals, certain trusts, and estates, and none of its shareholders may be partnerships, corporations or non-resident alien shareholders. All shareholders of an S-Corporation must be either U.S. Citizens or resident aliens. An S-Corporation cannot have more than 100 shareholders, and the business may only have one class of stock (if stock is issued.)

Unique to California is the business entity known as the Professional Corporation. While in many states certain types of business can form as Limited Liability Companies, California is not one of them. According to the Moscone-Knox Professional Corporation Act “Professional services” are any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Public Accountancy Act, or the Osteopathic Act. A “professional corporation” is a corporation organized under the General Corporation Law or the Moscone-Knox Professional Corporation Act and that is engaged in rendering professional services in a single profession (except as authorized in § 13401.5) pursuant to a certificate of registration issued by the governmental agency regulating the profession and that in its practice or business designates itself as a professional or other corporation as may be required by statute. This requirement applies to many of the licensed professionals in the State of California, including doctors, dentists, nurses, attorneys, accountants, pharmacists, optometrists, clinical counselors, chiropractors, and more. A list of the different types of Professional Corporations are as follows:

1. Professional Law Corporation
2. Professional Architecture Corporation
3. Professional Court Reporters Corporation
4. Professional Accountancy Corporation for public accountants and/or certified public accountants.
5. Professional Pharmacy Corporation
6. Professional Engineering Corporation
7. Professional Medical Corporation
8. Professional Podiatric Medical Corporation
9. Professional Psychological Corporation
10. Professional Speech Language Pathology Corporation
11. Professional Audiology Corporation
12. Professional Nursing Corporation
13. Professional Licensed Marriage and Family Therapist Corporation
14. Professional Licensed Clinical Social Worker Corporation
15. Professional Physician Assistant Corporation
16. Professional Optometric Corporation
17. Professional Chiropractic Corporation
18. Professional Acupuncture Corporation
19. Professional Naturopathic Doctor Corporation
20. Professional Dental Corporation
21. Professional Clinical Counselor Corporation
22. Professional Physical Therapy Corporation
23. Professional Registered Dental Hygienist in Alternative Practice Corporation
24. Professional Midwifery Corporation

To make this more complicated, the naming requirements for each profession vary, which means reliance on an experienced formations attorney is crucial to making sure your professional corporation can begin operating as soon as possible. Otherwise, the incorporation documents may be rejected or you may need to file an amendment to your articles of incorporation, to be in compliance with the respective licensing board that governs the profession. Professional corporations also have stringent requirements for shareholder qualifications, for example, for Professional Architectural Corporations, the shareholders, officers, and directors all must be licensed architects.

A business can formed as a Limited Liability Partnership if, and only if, you are licensed as either:

• Lawyer
• Architect
• Accountant

An LLP should have a formal, written agreement that sets out how the LLP will be run. To form a California LLP, partners are required to file an Application to Register a Limited Liability Partnership with the California Secretary of State. If the LLP is composed of lawyers, the LLP will have to registered with the California State Bar after the application is approved.

A non-profit public benefit corporation can be formed in California by filing Articles of Incorporation of a Nonprofit Public Benefit Corporation with the SOS. These entities are ones that are organized primarily or exclusively for charitable purposes and which plan to obtain state tax-exempt status under California Revenue and Taxation Code section 23701d and/or federal tax-exempt status under Internal Revenue Code section 501(c)(3) as a nonprofit Public Benefit Corporation. In the articles, the corporation is required to declare as its Purpose Statement whether it is being organized for either public purposes or charitable purposes. If it is intended to be for both public purpose or if it intends to apply for tax-exempt status in California, a specific purpose must be entered. A non-profit will not have any shareholders or owners, but it will have bylaws and officers and directors are needed to govern the organization.

Family Limited Partnerships (commonly called FLPs) are frequently used to move wealth from one generation to another. Partners are either General Partners (GP) or Limited Partners (LP). One or more General Partners are responsible for managing the FLP and its assets. Limited Partners have an economic interest in the FLP, but typically lack two noteworthy rights: control and marketability. Limited Partners have no ability to control, direct, or otherwise influence the operations of the FLP. They can neither buy additional assets, nor sell existing assets, and they cannot act on the Partnership’s behalf. They also substantially lack the ability to sell their interest, with one typical exception: transfers to immediate family members (spouse, siblings, and direct lineal descendants and ascendants). FLPs are partnerships limited to family members, hence the name.