The Limited Liability Company (LLC) is a popular legal entity for small businesses, since it gives business owners liability protection and pass-through tax status, while keeping the business formalities and paperwork to a minimum.
The LLC is a relatively new business structure in the U.S. While each state has its own guidelines for forming and managing an LLC, they all follow the same general principles.
If you need to form an LLC for your business, you’ll typically need to put together two documents:
- Articles of Organization
- Operating Agreement
1: Articles of Organization (Mandatory)
The Articles of Organization is the legal foundation for your LLC and is required by every state. It outlines the basic information for your business, including:
Your Business’ Name
While this is relatively straightforward, you do need to make sure that your name doesn’t conflict with the name of another business already registered in the state.
Your Business’ Purpose
In most states, you don’t need to be specific about your purpose. A template statement like “to engage in any lawful activity under state law for a limited liability company” will suffice.
Your Business’ Principal Place of Business
This is the main location for your business.
Your Business’ Registered Agent
This is the entity who will receive official papers and legal documents on behalf of your business. This includes renewal notices from the state and any documents related to lawsuits. The registered agent must be located in the state where your LLC is registered and must have a physical street address. If you prefer not to use your own/business address as the registered agent, you can use a Registered Agent service to handle this for you.
Your Business’ Management Structure
Most states require that you specify your management structure: Single manager, more than one manager, all members are managers. You may also need to provide the names and addresses for each of the managers.
Your Business’ Duration
Not all states require you to specify how long your LLC will operate. You can choose to say “perpetual” and not give a specific end date. A few states set a statutory limit on the duration (usually a few decades). You can always extend your LLC for longer if it’s still in business when you hit the end of the period.
In most cases, you can simply fill in the blanks for the above information, sign the form, and file it with the state. The Certificate you receive from the state should be kept with your Registered Agent or another safe spot.
2. Operating Agreement (Should Have)
The Operating Agreement is not required by most states, but it’s highly suggested, particularly for multi-member LLCs. While the Articles of Operation outlines your business’ basic information, the Operating Agreement defines your business’ key financial and functional decisions.
If there is more than one member, it is important to define how key business decisions will be made, how profits and losses will be distributed, and what happens when someone wants out of the business. Once members sign the document, it becomes an official, binding contract. While the Operating Agreement is not mandated by state law, it’s an essential document to keep your business running smoothly and prevent complications, even lawsuits, down the road.
The specific issues you include in your LLC operating agreement depend on your particular situation and business type. However, most agreements include the following:
Members’ Percentages of Ownership
LLC members are free to divide up ownership in any way they choose.
How Profits and Losses Will be Distributed
In addition to defining the ownership interests, you also need to define how the LLC’s profits and losses will be distributed among members. In most cases, this will match the percentage of ownership (i.e. if you own 50% of the business, you’ll get 50% of its profits and losses).
However, the LLC does give you the flexibility to make the distributive shares different than ownership percentage (this is a key way the LLC differs from a corporation structure).
Voting Rights
How will important management decisions be made? Will each member get a vote that corresponds to his/her percentage interest in the business or will you use per capita voting (one member = one vote)? Do decisions require a majority vote or a unanimous decision?
How the LLC Can be Dissolved
When you are just starting a business, you don’t always think about how it will end, but it’s a smart idea to outline what happens if one owner dies or wants out of the LLC.
You need these two documents when you start your LLC, but you will also be required to file an annual/biennial report with the state (although a few states don’t require this at all). This document typically includes the basic information laid out in your Articles of Organization to ensure the state has current information on your members, address, etc.
It’s a simple form, but is absolutely critical to making sure your business remains in good standing and you continue to have liability protection.
LLC Photo via Shutterstock
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Aira Bongco
Thank you for an in-depth guide. I think this will really help all of those new small business owners who are interested on forming an LLC.
Thank you Aira. I hope so! 🙂