In today’s post, I want to discuss the idea of member classes in a California Limited Liability Company (LLC). In prior posts, I’ve mentioned that nowadays, it is extremely easy and inexpensive form an LLC in, basically, any US state. There are many companies on the Internet that claim to be able to do this in just a few minutes.
One common situation that I’ve seen arise is the desire to have two or more groups of members within an LLC. Remember that when discussing LLCs, the common terminology is to refer to an owner as a “member”. You might be more familiar with the term “shareholder” when discussing owners of a corporation. LLCs do not have shares so the term “shareholder” doesn’t technically apply. However, aside from the words, the idea behind “shareholder” and “member” is the same. Anyway, one group of LLC members might be, for instance, those who own a part of the LLC, but also have decision-making ability. Members of this group might own very large portions of the LLC so they have more at stake or they might be heavily-involved with the day-to-day given their specialized skills or expertise.
The other group of LLC members might be, for lack of a better word, “silent partners”. These members might only own a small percentage of the LLC. They have limited decision-making ability and, basically, are only there for the financial benefits, such as receiving a portion of the LLC’s profits. Some investors may not want to be involved in the day-to-day details of running a business. They instead just want to provide the money and reap the financial reward later when the business succeeds. They might own small portions of many LLCs to diversify their investments. This is the approach that the vast-majority of individuals follow when they, for instance, buy 100 shares of any publicly-traded company. If you buy 100 shares will give you some voting ability, but that pales in comparison to the influence of an institutional investor with millions of shares.
Is it permissible to have different groups or classes of members in an LLC like this? The answer to that is yes and that comes from Section 17712.01 of California’s Corporations Code. That section states:
The articles of organization or the operating agreement may provide for the creation of classes of members having those relative rights, powers, and duties as the articles of organization or operating agreement may provide, including rights, powers, and duties senior to other classes of members.
As usual, I’ve bolded and underlined some important parts in this statute:
- The first is that the fact that different class members are allowed at all can be specified in one of two different places (a) the Articles of Organization itself, or (b) in the Operating Agreement.
- The second is the fact that the differences between each of the classes can be specified in the Articles of Organization or Operating Agreement also.
As always, I hope you found this post helpful and informative. It is not meant to be a comprehensive discussion of all of the details and possibilities that might exist when dealing with different member classes in an LLC. If you are dealing with a situation involving member classes in a California LLC, please do conduct your own research as I have no way of knowing anything about your situation. If you are dealing with a situation involving member classes in a California LLC, please do also consider finding a lawyer with whom you can discuss the specifics of what you’re dealing with.
Good luck.
Andy Chen
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