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What Securities Laws Impact The Formation Of A Limited Liability Company?

Formation of a limited liability company is affected by the same securities laws that affect formation of a corporation. An extensive qualification process will be required if the offering is made to a large number of people, is publicly advertised, is sold or promoted through seminars to the general public, or similar “public” types of sales efforts or if there are other types of conditions that require qualification of  a security. Most LLCs are formed under the “Small Offering Exemption” in California, which allows up to 50 owners with pre-existing business or personal relationships and where sales of the securities are not offered to the general public or advertised without having to comply with qualification requirements for securities. In fact, 95% or more of all LLCs formed in California annually are formed without requiring formal securities qualification.

It must be noted however that in any event “antifraud” rules still apply to formation of an LLC or corporation. For instance, if someone is selling an LLC investment to five people within the small offering exemption, but he misrepresents facts or fails to present relevant information known to him that could affect the investors’ willingness to invest, that person has likely committed a securities’ violation under Federal Rule 10(b)(5), and will be liable for that misrepresentation even though he did not have to qualify the securities.

The Difference Between Member-Managed And Manager-Managed LLCs

A member-managed limited liability company is one in which all members can vote on day-to-day business affairs and have an active say in daily operations, whereas a manager-managed LLC has one or two people who are designated to manage the entity, with the non-manager members essentially being “silent” in that they are owners of the business but don’t have an active say in daily business operations.

California law requires most operating agreements to give “silent” members votes on important or organic decisions, such as whether to continue operations; sell significant assets; incur significant loan obligations;  admit other members;  or expand the business line or relocate to another state.  Big decisions are typically made by a vote of the members because most owners are content to have one or a limited number of people handle the day to day operations, but want to have a voice on larger decisions that may fundamentally affect their investment.

Are There Differences Between A Limited Liability Company And A General Partnership?

The legal difference between an LLC and a partnership is that a general partnership imposes liability across all partners jointly and severally, meaning that, if two people operate a business as a general partnership, any liability for negligence will be shared by the partners, “jointly and severally”, regardless of who the negligent party is so long as they are “agents” of the partnership.

In a LLC, the entity itself is liable for the claims, but considered individual owners are not, unless they are the actor who created the problem.

For more information on Difference Between LLC and Partnership, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (916) 635-0302 today.