What Is a Limited Liability Company?
Two or more individuals can form a limited liability company or LLC, and members can be other entities, corporations, or partnerships. LLCs offer limited personal liability to its members. However, in some cases, members can still be responsible for certain company obligations, especially when personal guarantees are signed.
Instead of partners or shareholders, LLCs have members and are issued member certificates based on the percentage they own in the LLC. This type of corporate structure is considered a pass-through entity for tax purposes meaning at tax time, members are issued a K-1 showing the company’s profit (or loss) and the member must report that amount on their personal tax return. The LLC itself does not pay taxes.
Unlike articles of incorporation, LLCs create articles of organization. Finally, to complete corporate documents and be in compliance with your state’s corporation commission, you will need a sample of an operating agreement for a limited liability company that will outline how the entity will be run.
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Creating the Operating Agreement
I have incorporated as both a Subchapter S Corporation and a limited liability company. I prefer, as anyone can, to skip the legal fees and incorporate on my own. Almost every form you will need to form an LLC is available from your corporation commission, including a sample operating agreement, or you can utilize the sample found in our Media Gallery.
Depending upon the state where you incorporate, most likely you won’t have to submit the operating agreement to your corporation commission, but you will have to submit the articles of organization, registered agent forms, and possibly other forms as required by your state such as member officer forms.
The operating agreement is important as it describes the business, states the members, and identifies the registered agent. It also outlines in depth how the corporation will be run and how member certificates can be sold, transferred, or terminated.
Any member of an LLC is considered one who has invested money into the corporation and is issued member certificates; however, members vote on who will hold certain offices. Members vote on who the president, vice president, secretary, and treasurer will be along with any other offices deemed necessary.
While a member may hold an office and have voting power, other individuals with no member shares may still be office holders or directors with no voting power, such as the general manager of a company.
The operating agreement dictates what each officer or director is responsible for and, depending upon the office held, one member may hold more decision power than another regardless of how many member certificate shares they hold. For example, the president or presiding member of an LLC usually holds the most power when it comes to company decisions but does not have to be the majority holder in the LLC.
It’s important to state what each officer or director is responsible for and who will replace him or her in case the person becomes incapacitated or deceased prior to the end of their term.
Finally, the operating agreement is the go-to document if members disagree or clarification is needed on how the company will be run. No LLC can be totally formed without an operating agreement because it is considered the governing document. If you plan to incorporate using the LLC entity, make sure you create an operating agreement or use the sample of an operating agreement for a limited liability company, which can be found in our Media Gallery.
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