Under California Corporations Code Section 15901.02, what is a key characteristic that distinguishes a Limited Liability Company from a corporation?
Correct Answer
D) LLCs have more flexible management structures
LLCs offer more flexible management structures compared to corporations, which must follow specific corporate formalities like boards of directors and formal shareholder meetings.
Why This Is the Correct Answer
LLCs are distinguished by their flexible management structure. An LLC can be managed by its members (member-managed) or by designated managers (manager-managed), and the operating agreement can be customized extensively. Corporations must follow rigid statutory requirements including boards of directors, officers, shareholder meetings, and formal resolutions.
Why the Other Options Are Wrong
Option A: LLCs must distribute profits equally
LLCs do NOT require equal profit distribution. Members can agree in the operating agreement to distribute profits in any proportion they choose, regardless of ownership percentage. This flexibility is actually an advantage of the LLC structure.
Option B: LLCs cannot enter into contracts
LLCs absolutely CAN enter into contracts. An LLC is a legally recognized business entity with the capacity to contract, sue, be sued, own property, and conduct business. This statement is completely false.
Option C: LLCs cannot have more than 10 owners
There is no statutory limit of 10 owners (members) for a California LLC. LLCs can have an unlimited number of members. The 10-person limit historically applied to S-corporations, not LLCs.
Memory Technique
LLC = 'Loose and Customizable Corporation.' The hallmark of an LLC is flexibility — in profit sharing, management structure, and operating rules. Corporations follow a rigid statutory playbook.
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