Formation, Structure and Operating Agreement

Formation

Creating a Limited Liability Company is governed by State law. A Limited Liability Company is formed by individuals who file the required documents with the appropriate state authority, which is usually the secretary of state. In most states, the filing of articles of organization is required. Articles of organization are considered public documents and are similar to articles of incorporation, which establish a corporation as a legal entity. The Limited Liability Company usually comes into existence on the same day the articles of organization are filed and the secretary of state is paid a filing fee.

The minimum information which is required for the articles of organization will vary from state to state. Usually, it includes the name of the Limited Liability Company, the name of the person who is organizing the Limited Liability Company, the duration of the Limited Liability Company, and the name Limited Liability Company’s registered agent. In some states, additional information is required, such as the business purpose of the Limited Liability Company and details about its membership and management structure. In all states a Limited Liability Company’s name is required to include words or phrases identifying it as a limited liability company. These may be the specific words such as Limited Liability Company or various abbreviations of those words, such as LLC, or Ltd. Liability Co.

Structure

Limited Liability Company owners are referred to as members and, in some respects, they are similar to shareholders of a corporation. A member can either be a natural person, a corporation, a partnership, or another legal association or entity. Unlike corporations, which may be formed by only one shareholder, in most states Limited Liability Company’s must be formed and managed by two or more members. Therefore, Limited Liability Companies in those states are unavailable to sole proprietors (the only exception is the state of Florida, which allows single member Limited Liability Companies). Additionally, unlike some closely held, or S, corporations, which are allowed a limited number of shareholders, Limited Liability Company’s are allowed to have any number of members beyond one.

In general, state law outlines the required governing structure of a Limited Liability Company. In the majority of states members may directly manage a Limited Liability Company or they may delegate management responsibility to one or more managers. Managers of a Limited Liability Company usually are either elected or appointed by the members. Some limited liability companies may have one, two, or more managers. Similar to a general partner in a limited partnership or an officer in a corporation, the manager of a Limited Liability Company is responsible for the day-to-day management of the business.

A duty of loyalty and care is owed by the manager to the Limited Liability Company. Without consent of the members, a manager may not use property of the Limited Liability Company for personal benefit, nor may he compete with the Limited Liability Company’s business. Additionally, a manager is not allowed to engage in self-dealing, nor can he assume a Limited Liability Company’s business opportunities, unless the members agree to a transaction which involves such activity after being fully informed of the manager's interest.

Operating Agreement

Nearly every Limited Liability Company maintains a separate written or oral operating agreement. This agreement is generally defined as an agreement between the members governing the affairs of the Limited Liability Company. In some states, an operating agreement is called regulations or a member control agreement. Although an operating agreement is not required in some states, nearly all Limited Liability Companies create and maintain a written document detailing their management structure.

The operating agreement typically provides procedures for admitting new members, outlines the status of the Limited Liability Company upon withdrawal of a member, and outlines procedures for dissolving the Limited Liability Company. Unless state law restricts the contents of an operating agreement, Limited Liability Company members are free to structure the agreement as they see fit. Usually, a vote of the members of a Limited Liability Company can either amend or repeal provisions of its operating agreement.

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