Forming a new business LLC in San Diego is an exciting time. Most new businesses in San Diego will be Limited Liability Corporations or LLCs or an S-Corporation. What are the advantages of an LLC for a new business startup in California?
Key Takeaways about Forming a New Business LLC in San Diego:
- LLCs provide protection for you personally, as well as your personal assets and financial accounts. This is known as the “corporate veil.”
- California LLCs are different than those of other states. You need an experienced, proven business formation attorney from the Watkins Firm to guide you during formation.
- When forming a new business LLC in San Diego, one of the most important—and most overlooked—steps is investing the time to develop a thorough, well-structured LLC operating agreement.
- A MIPA works in coordination with the operating agreement to establish clear rules for the sale or transfer of a member’s interest.
LLCs Provide Protection and Flexibility
LLCs provide protection for you personally, as well as your personal assets and financial accounts. The reason to have an LLC (or any corporate entity) is that it establishes a separate legal “entity” from you as a person, known as “the corporate veil.” The new business (LLC) is a protected company that conducts business and any resulting liabilities are legally associated with that business. They cannot be passed on to you personally as long as you protect the “corporate veil” of your LLC.
The LLC is designed to be simpler to operate and maintain and passes income through to the “Member(s)” (owners) for taxation purposes. There is no corporate tax on an LLC, however, the entity must pay California a tax of $800 per year as a “franchise tax” fee.
Are California LLCs Different than Other LLCs?
Are California LLCs different than other LLCs? Yes, there are many advantages to consider when starting a new business LLC in San Diego and throughout the State of California. A California LLC does not require a board of directors or corporate officers (CEO, etc). One doesn’t have to hold annual corporate meetings, record minutes or even establish corporate bylaws.
It is important to note that California laws are different than most states, and the types of LLC incorporation documents and operating agreements you find on popular download sites and on the internet do not address these laws specifically or adequately. For example, the default position of California law is basically designed to protect minority ownership interests in your LLC above your own, unless the corporate documents and the operating agreement specifically state otherwise.
The Most Overlooked and Important Issue when Most Start a New LLC: The Operating Agreement and the Membership Interest Purchase Agreement or MIPA
When forming a new business LLC in San Diego, one of the most important—and most overlooked—steps is investing the time to develop a thorough, well-structured LLC operating agreement. This is especially true when there is more than one member. While filing documents establish the LLC’s existence, the operating agreement governs how the business actually functions and how risk is managed when circumstances change.
An operating agreement focuses on the legal and practical relationship between the members. It establishes the authority to make decisions, describes the responsibilities and specific rights of each member, and provides a roadmap for resolving disagreements before they turn into disruptive disputes. Without clear terms in place, members often rely on default “boilerplate” rules that may not reflect their intentions or protect the business.
A properly drafted operating agreement anticipates issues that commonly arise over the life of a business, including:
- The death, incapacity, divorce, or bankruptcy of a member
- Unequal participation or failure of a member to meet expected obligations
- Capital contribution disputes or future funding needs
- Allocation of voting rights and management authority
- Restrictions on transferring or selling ownership interests
Then Why do we Need a MIPA?
One of the most critical—but frequently ignored—questions is what happens when a member of your LLC wants or needs to exit the business. This is where planning becomes essential. An operating agreement should clearly address whether ownership interests can be sold, to whom, and under what conditions. It should also define how the business will be valued and how remaining members are protected from being forced into business with an unintended or incompatible new partner.
In many well-planned LLCs, these issues are addressed through a Member Interest Purchase Agreement (MIPA). A MIPA works in coordination with the operating agreement to establish clear rules for the sale or transfer of a member’s interest. It typically outlines:
- Triggering events that allow or require the sale of a member’s interest
- Valuation methods to determine a fair purchase price
- Funding mechanisms for the buyout
- Rights of first refusal in favor of existing members
- Protections that prevent unwelcome or destabalizing third parties from attempting to gain an ownership interest in your LLC
By pairing a strong operating agreement with a carefully drafted MIPA, members gain predictability and control. Disputes are easier to manage, exits are less disruptive, and business continuity is protected.
When forming a new business LLC in San Diego, these “corporate documents” are not boilerplate administrative formalities—they should be customized risk-management tools. Your Watkins Firm attorney will help you to understand the importance of corporate governance, and how the operating agreement and MIPA guide future ownership transitions, and valuation issues. Handling all of these matters at the outset of forming a new business LLC in San Diego preserves flexibility, protects relationships, and prevents costly conflicts later. Thoughtful planning early on gives the LLC the structure it needs to grow while protecting the interests of everyone involved.
Pro-Tip: “The purpose for forming a new LLC in San Diego, or any business entity is to allow you to take the types of risks you need to in order to have a successful business and make money. You have different types of companies, different types of licenses, different types of product, different types of ways of making a profit companies that just hold asset. You have companies for asset protection. You have companies for professional corporations, companies for real estate development companies for healthcare companies, for international business, the list goes on and on. And so when you come to an experienced lawyer who has experience with your type of company, you’re going to get insights and you’re going to get formation and you’re going to get a custom fit for the documents that are required in your specific type of business and for what your business goals are.
It’s important to select the right entity. It could be just a fictitious business name, or it could be a corporation. It could be a couple of companies, two or three companies. It could be a combination of the above. For example, here’s a good example. You have a company and you own a building and you run your company out of that building. A lot of our clients will have a corporation for the business and they’ll have another company or their own entity for the building and lease the building to their own company. And when you have an experienced lawyer, we usually come with experienced tax professionals and experienced bankers and experience other service industry individuals that are entities that help business.
Another thing startups often underestimate is the importance of getting the corporate documents right. How do corporate documents set a new company up for success? Well, we guide the client on what’s best for them, and we’ve guided them through the process of questions that we ask them that lead us to the conclusion, they need a limited liability company or a corporation or general partnership or whatnot. If it’s a corporation, then we’re going to form that for them, for the person who’s hiring us. Because most people don’t understand lawyers are advocates, not just in the courtroom, but we’re advocates for you, the business owner. When we draft your documents, we’re your advocate. We are thinking, how can I best protect my client and achieve their goals for them when we form and create the corporate documents?
We customize our documents when we form a corporation. Unlike when you go to the internet or some of these companies that give you a bland agreement, that’s neutral, we give you an agreement that is biased in your favor, which is important because you may want to have investors. You may want to sell the company someday. You may want to own the intellectual rights. You may have an invention that you’d like incorporated in that company. On top of that, one of the big reasons for forming a company is making sure that it’s protects you. That’s the essence of a company – the corporate veil. If your documents aren’t formatted properly, if you are not set up and organized correctly, if all of the legal requirements for having a separate entity are not in place, then you’ve wasted your time and money because you will have no protection when a creditor comes after you. Your corporation or LLC is somewhat like an insurance policy.
If you do everything right when forming a new LLC in San Diego, and something goes wrong down the road, one of your employees does something bad, or a dispute with a customer comes up, you are personally protected. You’re only liable for the amount of money you capitalize that corporation with. So that means you are protected. If you do everything right, you can also use this corporation, sell it, merge another company with it, and everything your planning to accomplish. And all of the time you spend to do things right pays off, literally. The other lawyer representing the individual or company who wants to do business with you is going to look at your corporate documents and say, yes, they did everything right. And it’s professional, and worth a lot more money!” – Dan Watkins, Founding Partner
Forming a New Business LLC in San Diego or Anywhere in the State of California
Are you considering forming a new business LLC in San Diego or anywhere in the State of California? We understand that every dollar is precious at this moment in time, but your new business entity is all that will separate creditors from your personal assets – your home, your cars, your bank accounts. The structure of your entity and important documents like the operating agreement provide important protections and prevent costly disputes down the road. It’s important to invest the time to understand all of the clauses and documents when forming an LLC in San Diego.
The best news is that the attorneys at the Watkins Firm will provide a free and comprehensive consultation that explains many of these core issues. We invite you to review our Podcast Episode 2 – Starting a Business, and episode 34 – Business Formation, as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
We will have an informative discussion and share the benefit of our more than four decades of service to the San Diego business community. We will tell you up front all that we will do for you, and how much it is going to cost before you agree to hire us. We will give you a solid budget that is cost-effective and serve as your personal business coach to help ensure that your new business lays a solid foundation upon which your venture can survive and thrive.
Meet Daniel Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through. Dan enjoys digging into the facts and finding creative solutions to problems. He contributes his insights candidly and constructively.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
