In my San Jose law practice, I often meet with clients who tell me they want to form a certain type of entity, and then proceed to tell me some facts that actually disqualify them from that form of entity. Even worse is when the client tells me that some other advisor told them they should be that form of entity. Recently, I met with a Cupertino real estate investor who said his financial advisor told him he should form an LLP for his property (he was not eligible to be an LLP). In Silicon Valley, we have a lot of do-it-yourselfers who form their own company online and then regret their ill-informed choice of entity and have to pay an attorney a lot more to fix the problem than they would have paid to do it right in the first place.
Here are some basic facts about LPs, LLPs and LLCs in California to help you make a more knowledgeable initial decision.
LP: This stands for “Limited Partnership.” In a limited partnership, at least one partner must be a general partner, which means that partner will be personally responsible for any liabilities of the partnership, as well as partnership decisions. The limited partners are not responsible for partnership liabilities, but also do not have any say in the management of the partnership.
LLP: This stands for “Limited Liability Partnership.” In California, only attorneys, accountants, architects, and now engineers and land surveyors are eligible to be LLP partners. The partners operate much like general partners, but have insulation from each others’ liability.
LLC: This stands for “Limited Liability Company.” [Note: there is no such thing as a “Limited Liability Corporation” in California.] Only certain types of businesses are eligible to be LLCs in California. You are not eligible if you are in the trust or banking business or if your business requires a license or certification under the California Business and Professions Code (“B&P Code”) unless that section of the B&P Code specifically allow for LLCs. For example, as of January 1st of this year, the B&P Code provides that licensed contractors are eligible to be LLCs in California. LLCs can be managed either by designated managers, or by the members. The members and managers are not personally responsible for LLC liabilities.
Once you understand LPs, LLPs and LLCs, don’t forget to still consider the corporation to see if it is the best fit for your business. Above all, make sure to run your decision by a legal professional to make sure you haven’t missed any other considerations when you are ready to form an entity.