During company formation entrepreneurs of technology startups may choose to create a Limited Liability Company (LLC) in California, Delaware, or another state. The function and formalities of LLC Operating Agreements in California and Delaware can be puzzling to technology startups, newly formed companies, and the entrepreneurs or investors behind ventures in mobile applications, social networking platforms, and innovative technology touching various sectors of industry.
CALIFORNIA LIMITED LIABILITY COMPANY (LLC) STRUCTURE
A California LLC structure offers limited liability protection similar to that of a corporation but is taxed differently. Limited Liability Companies may be managed by one or more managers who handle day-to-day tasks, or by one or more members. The term “member” is used to refer to equity stakeholders of LLCs in California and Delaware – similar to shareholders in a corporation.
A California Limited Liability Company Operating Agreement is among the required formalities of LLC formation. An LLC Operating Agreement is a legally binding contract between the LLC Members, the LLC managers, and the LLC itself as a separate entity. In addition to the required filings with the California Secretary of State, which may consist of the Articles of Organization and Statement of Information Disclosure, an LLC Operating Agreement is a critical founding document of newly formed ventures. The LLC Operating Agreement governs the affairs of the organization and the conduct of its business, addressing important financial and managerial terms related to company operations and profits. While the operating agreement is not filed with the Secretary of State like other formation documents, the LLC must maintain an original copy of the Operating Agreement at the office where the LLC’s records are kept.
UNDERSTANDING LLC OPERATING AGREEMENTS (TECH STARTUPS)
For tech startups undergoing legal due diligence in the entity formation phase, whether structured as an LLC or corporation, the legal issues presented in Corporate Law cannot be avoided. Whether operating in a garage with two founders, or in entire buildings in New York and Silicon Valley, a business owner’s informed understanding of issues such as voting rights, capital structure, equity ownership, investment funding, tie breakers, and intellectual property ownership, is vital to running a successful company.
Asset protection behind the corporate veil remains the primary motivation for forming a Limited Liability Company in California or Delaware. However, the LLC Operating Agreement is also a necessary and proper component of company formation because it forces startups to review and agree to policies and protocol, and more critical issues such as equity and intellectual property ownership rights, all essential to professional and efficient management of any organization, business venture, or small enterprise, particularly those in the business of innovation.
Author: David N. Sharifi, Esq. is a Los Angeles based intellectual property attorney and technology startup consultant with focuses in entertainment law, emerging technologies, trademark protection, and “the internet of things”. David was recognized as one of the Top 30 Most Influential Attorneys in Digital Media and E-Commerce Law by the Los Angeles Business Journal in 2014. Office: Ph: 310-751-0181; firstname.lastname@example.org.
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