Many entrepreneurs looking to start up a business are often curious about the differences between filing as a corporation or as a limited liability company (LLC). The differences between the two vary from state to state. In California, an LLC operates as a sort of hybrid of a corporation and a partnership. It provides its owners – commonly referred to as “members” – with limited liability to identical to that enjoyed by corporate shareholders. There are several differences between corporations and LLCs, including formalities and certain tax variances, but for the most part, the entities are almost identical from the perspective of their owners. However, there are some differences when it comes to the privacy of the entity’s owners.
In order for a corporation or LLC to be formed, an Article must be filed with the Secretary of State (the State’s Secretary of State – not Hillary Clinton). For a corporation, this document is referred to as the Articles of Incorporation (CA Corporations Code §202); for an LLC, a similar document called the Articles of Organization must be filed (CA Corporations Code §17051). A corporation is not required to name any shareholders in its Articles of Incorporation. Similarly, for LLCs, the names of the members, the managers, or the amount of the members’ investments need not be disclosed in the Articles of Organization. Both Articles require similar information when filed, including;
- Name of the corporation or LLC
- A statement of the company’s purpose
- Name and address of the corporation’s or LLC’s agent for service of process (the person or company who will receive service of a lawsuit on behalf of the entity)
Both types of entities must also file “statements of information” within ninety days pf the initial filing of the Articles and, f0r a corporation, every year thereafter; for an LLC, every other year thereafter. In their Statements, LLCs must disclose the name and business or residence address of its manager or managers (and Chief Executive Officer, if there is one). If there are no managers, then the Statement has to disclose the name and addresses of all of the LLC’s members (CA Corporations Code §17060(a). This is a crucial piece of information, but in order to understand why, we need to look at the parallel requirements for a corporation.
A Statement of Information for a corporation requires (under CA Corporations Code §1502):
- Name and address of its incumbent directors
- Number of vacancies on the board, if any
- Name and address of its Chief Executive Officer, Secretary, and Chief Financial Officer
- Street Address of its Principal Executive Office (and mailing address, if different from the street address)
- A statement of the general type of business that constitutes the principal business activity of the corporation
- the agent of the corporation for the purpose of service of process
While these may appear to be minor differences, the end result is that a properly-constructed LLC can offer a great deal of privacy. Investors in small corporations often want to be part of the Board of Directors in order to exert control over the operations of the company. As we have seen, those Directorships are a matter of public record. An LLC, however, does not need to reveal the names of its Board members (if any – often, LLCs do not have a formal Board). Nor do LLCs need to reveal the names of their Secretaries or CFOs. Finally, an LLC can maintain the privacy of all but one of its owner/members by appointing one member as a manager. If the LLC chooses to designate a nonmember as a manager, then none of the members (remember, in the context of an LLC, “member” is a term for owner) will have their names as part of the public record. Only the names of the manager and CEO – often the same person – must be revealed. As a result, all other factors being equal, business owners forming new entities in California often choose to form an LLC rather than a corporation. Stay tuned for future blog posts, in which I’ll discuss other issues confronting corporations and LLCs.