Legal Question in Business Law in California

Re: California LLC, what qualifies as members?

Husband and wife are counted as one person for a few purposes in business law, such as counting the number of shareholders an "S" corporation has, or how many offers to sell securities have been made by an issuer, but I cannot find any authority for the proposition that husband and wife would be counted as other that two separate members if the LLC did in fact make both of them members.

In fact, I have just looked at a couple of cases from state and federal appellate courts where a husband and wife were referred to as the "members" (with an s) of the LLC, and although whether they should be treated as a single member wasn't the issue, it was obvious that the judge's opinion regarded them as having separate status and interests in the LLCs' affairs.

An operating agreement must be between all the members, but there is no provision in the law requiring or permitting them to be "filed" with any governmental agency. Instead, an LLC should file various short forms with the Secretary of State (a) to come into legal existence in the first place, by filing an LLC-1, and later on if there are changes in the members, officers, registered agent, etc. other form probably need to be filed to report those changes - LLC-2 and LLC-12 are two that come to mind.

You can look at the forms, the instructions for their use, and the filing fees on-line at www.ss.ca.gov, the Secretary of State's Web site.

Re: California LLC, what qualifies as members?

If you both file as members with the LLC then it will not be a "single member" LLC in the eyes of the Federal and State Government. Generally in business law under an S-Corporation and the Tax Codes husband and wife are treated as a partnership.

The ly-Killea Limited Liability Company Act for California was only enacted in 1994 so the law is still new for LLC issues in CA. On the other hand corporation law has been around for a long time in California. An S-Corporation may or may not have advantages in your particular situation and would probably be the business choice that I suggest. You should probably consult an attorney and your accountant for the formation of your new business or entity so that the best formation is achieved for your situation.

With that in mind, members may be natural persons, partnerships, limited partnerships, trusts, estates, associations, corporations, other LLCs, or other types of entities, whether domestic or foreign (Corp. Code � 17001(x), (ae)). You may form a partnership or limited partnership between your wife and yourself and use that as the single member for the LLC so that a one entity LLC is formed.

On October 10, 2002, the IRS issued Revenue Procedure 2002-62, which clarifies the treatment of a single-member LLC owned by a husband and wife in a community property state like California. Prior to the issuance of Rev. Proc. 2002-62, there was a concern that an LLC with a single owner who was a resident of a community property state would automatically be treated as a two-owner LLC, since community property law generally creates a joint ownership between husband and wife. Rev. Proc. 2002-62 provides the IRS will follow the parties' characterization of the LLC.

Therefore, if an LLC is treated as being owned entirely by the wife, it will be treated as a single member LLC, despite the fact that the LLC interest would otherwise be community property under California law. Similarly, if a husband and wife treat the LLC as having two owners, the LLC will be a partnership for federal income tax purposes. However, if the parties change the characterization, the IRS will treat that as a restructuring of the LLC by either increasing the members from one to two or decreasing the members from two to one. Generally, the transfers between husband and wife would not result in adverse income tax consequences, provided that both husband and wife are U.S. citizens or resident aliens.

Each option, whether an S-Corp or LLC, has practical, legal and tax advantages and disadvantages. Because there are so many consequences I suggest that you seek a reputable attorney to properly form the entity that is best for your situation. It will be money well spent in the long run.

Please contact me if you need further assistance or would like to form the best entity for your particular situation. Thank you for your question.