Proper Formation and Maintenance of LLCs and Corporations is Mandatory

  • Proper formation of your LLC or corporation is mandatory to have legal standing in California. LLCs that lack operating agreements and corporations without approved bylaws may not be protected in California. Without legal standing your home and personal assets could be exposed to business lawsuits, liens and creditors. (See our article: “Does your LLC or Corporation have Legal Standing?” for details).

    Not only are operating agreements or bylaws necessary to establish legal standing under California law, they are also important (along with shareholder agreements) because they provide the framework for the operation and management of the company and legally bind owners and managers to its rules and procedures.

    The documents help to minimize financial and management misunderstandings and provide methods to resolve disputes without costly litigation. When a legal dispute does occur, the courts try to determine whether the principals have any personal liability based on the procedures called for in the documents. (See our article: “Operating Agreements and Bylaws—Why they’re Necessary” for details).

    Even LLCs and corporations that were properly formed can lose their legal standing or asset protection qualities if on-going compliance isn’t maintained or if owners or managers commit alter ego blunders. LLCs and corporations must be respected as legally separate from its owners and managers, annual filings must be made, certain decisions recorded in its minutes along with other required formalities.

    In addition to federal law, LLCs and corporations are regulated by the state laws where they were formed AND the state laws where they do business. If business is conducted in a state other than the one of formation then the laws of both states must be followed.

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