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How to Become an LLC and Follow Governance Requirements
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The Limited Liability Company (LLC) designation is a relatively young business entity in the United States. Compared to corporations whose history stretches beyond the birth of the United States (and whose laws evolved over centuries), LLCs remain new and a bit nebulous. Because LLCs are essentially a hybrid of corporations and partnerships, the law is unsettled on how to treat LLCs whenever a controversy arises. With time, the law will be settled, but due to this uncertain state, LLCs have limited governance guidelines as reflected upon the required governance documents.
Required vs. Needed
Before moving forward with the governance documents for an LLC, a distinction must be made between "required" governance document and "needed" governance documents. The "required" governance document entails the document that LLCs must have as mandated by state law. Without this document, the state may not recognize a business as an LLC. The "needed" governance document is not mandated by state law, but it is a document that every LLC should have to prevent future complications and possibly catastrophic lawsuits. Also to note, LLCs are generally required to file an annual (or biennial) report with the state. However, this article will not be addressing these reports.
Required Governance Document - Certificate of Organization
Every LLC requires a Certificate of Organization (also known as Articles of Organization). The Certificate is essentially the LLC's proof of existence within the state. The Certificate is issued by the state and requires a potential LLC to file its Articles of Organization with the state (accompanied with the necessary state fees).
The Articles of Organization sets forth the basic information of your business. Generally, states have minimal requirements for the Articles: (1) LLC's name; (2) LLC's purpose ("to engage in any lawful activity under state law for a limited liability company"); (3) principal and mailing address of the LLC; (4) duration of the LLC; (5) name and address of your LLC's registered agent (the entity who is authorized on the corporation's behalf to accept delivery of certain legal documents); and (6) the management structure (i.e. single manager, more than one manager, all LLC members as managers). Beyond these minimal requirements, some states may require to list the members of the LLC and the initial contribution of the LLC, as well as a limitation of liability clause.
Most, if not all, states have a standard Articles of Organization form that outlines the minimal requirements for the state. An applicant can simply fill in the blanks, sign, and file that form to create the LLC. However, depending upon the complexities of the LLC, the Articles may include these complexities, but the LLC can elect to include these special provisions within the Operating Agreement (see below). A professional should be consulted when considering these special provisions. The Certificate/Articles should be kept with the registered agent.
Needed Governance Document - Operating Agreement
States do not require LLCs to file an operating agreement. In fact, a number of states do not even require the operating agreement to be in writing to be enforceable. However, the operating agreement may prove to be the most important governance document an LLC can have and so every LLC should have a written operating agreement. Due to the relaxed requirements for the Articles of Organization, some of the most important governing aspects of an LLC are left unwritten. Similar to the bylaws of a corporation, the operating agreement fills in these blanks.
The operating agreement generally describes the functions of the managers/members, how members' meetings can be called, the formalities of members voting, tax and financial provisions (i.e. tax classifications, accounting method), procedures for and limits on issuing and transferring capital interests from members, the allocation of profits and losses, and the manner in which the LLC can be dissolved. These provisions give structure on how the LLC is managed. Many operating agreements contain indemnification provisions that may protect the members, the officers, or both, as well as a severability clause that allows the operating agreement to survive and be enforced even if a particular provision is held to be invalid. The operating agreement must be consistent with the Articles of Organization and if any discrepancy arises, the Articles hold precedence. The operating agreement should specify the procedures for amending the agreement.
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