There are two nightmare scenarios that can turn a business enterprise from a dream into a horror story when a limited liability company’s (LLC) documentation is not in order. First, a failed LLC in California is treated as a general partnership for all purposes. Second, if you are a member of the failed LLC, you will lose the protection of your personal assets from the LLC’s debts and liabilities. Small businesses frequently get started in a rush and are lacking in organization. As a result, details may be missed or delayed until a later time. Fortunately, it is not too late to get your LLC documentation in order and avoid the cessation of your LLC protection.
The default corporate form in California when a corporation or LLC fails because of improper documentation is a general partnership. Each member will be jointly and severally liable for the debts of the failed LLC. A creditor of the LLC can go after the personal assets of one of the members or all of the members to satisfy their debt. If the other members cannot cover the failed LLC’s debts and all of your assets are seized to satisfy the debts or liabilities, your only recourse after the debtor collects the whole amount from you, will be to sue the other members for payment of their share of the debt.
No Protection for Personal Assets
A general partnership is like a sole proprietorship in that the owner or partners have no corporate entity to shield their personal assets from the debts and liabilities of the failed LLC. There is no protection for personal assets of a partner in a general partnership for the debts of the partnership.
It is Not Too Late to Save Your LLC
If you find that your LLC’s documentation is not in order, you can catch-up with your filings and bring your status current. In California, in order to form your LLC, you must file LLC formation documents and pay the state filing fee. LLC formation documents are the state-specific forms that officially create your LLC. Be wary of internet self-help forms because they may not contain the requirements imposed by California for the establishment of an LLC. And these self-help forms may not be properly structured for your LLC’s specific business plan.
The basic documents required to form an LLC in California are the “Articles of Organization”, the “Action by Organizer” the “Formation Action by Managers”, and the “Operating Agreement”. These documents may have different names in other states. The Articles of Organization must be filed with the Secretary of State but the Operating Agreement and all other formation documents must be kept in the location where the LLC’s records are kept. These are just the basic formation documents. There may well be other essential documents required in the formation of any specific LLC.
If you are a business owner or entrepreneur looking for legal assistance, we can help! We are an experienced Northern California based law firm that has a record of success resolving complex business problems. If you are a business owner, corporation, or entrepreneur in need of business legal guidance, our business lawyers can help you. Our experience has helped corporations, LLCs, LLLPs, partnerships, emerging companies, startups, business brokers, entrepreneurs, and individuals across a wide spectrum of industries and trade. JGPC Law serves businesses in Fremont, Hayward, Oakland, Tracy, Manteca, and San Ramon from our Pleasanton and Livermore, California offices. Visit us online to request an appointment today or call us at (925) 463-9600.