PODCAST:

I recently put together a short audio recording for a group of entrepreneurs that wanted to know if their limited liability company entities needed an LLC Operating Agreement and if so, what this document accomplishes for their LLC busineses.

Listen to this 3 minute recording and you will get these answers and essential information about what you need to properly customize your LLC operating agreement.

 

 LLC Operating Agreement- Why It is Important: Play Now | Play in Popup | Download

Every llc operating agreement should contain a section which outlines what is required before a new member can be admitted to the limited liability company.  These provisions will apply not to the initial members when the business is started, but later on in the event the business wants to bring in a new person as an owner.

The first and most important requirement is to set forth what approvals are required by the existing members. There is no one best answer to this.  Some will want to require that every member approve the new member while others may only require a smaller vote like majority or perhaps something in between (75%).  The right percentage really depends on the circumstances and dynamics of the existing members.  Just make sure every initial member agrees to whatever is finalized for this requirements.

Secondly, the new member section of the LLC operating agreement must require that, as a condition to becoming a member of this LLC, the new member must sign a document, in writing, agreeing to all the terms and conditions of the LLC agreement.  This is very important because one of the biggest areas of dispute and problems with an LLC business is when a member of an LLC is not subject to the same rules and processes as the others.  By having a clear provision making this requirement a condition of any new member admission, you avoid this issue.

The process of LLC formation generally covers the LLC filing and processing of such filing by a state agency to officially create an LLC (which is a legal entity known as a limited liability company) in that particular state.

In most states, the owners (also known as the members) are not required to be identified or appointed in the formation documents. And, if this is not a requirement, you should not list your members on these documents for privacy purposes.  LLC filing documents become a matter of public record.

All the state has is the LLC name, a registered agent and the name of a person who is the organizer. The registered agent can be an owner but is not required to be.  Many business owners choose to use a registered agent service.  An organizer is the person who submits the filing documents but this person is not required to be an owner.  It can be a lawyer or a person at a document filing service who is preparing your LLC formation documents.

This means that it is up to you, after your limited liability company has been created, to officially admit yourself and any other owners as members of the legal entity.  This can be done in several ways but the most common way is through the company’s initial LLC Operating Agreement. In this document, you will establish how ownership of your LLC is structured (usually with membership units) and then set forth who owns how many membership units in the company.  Other details include the required capital contributions, member names and addresses, and parameters for what ownership gives a member in terms of financial rights and voting rights.

LLC formation is just the first step to creating a legal entity business.  The formation process itself involves doing what is necessary to create a limited liability company at the state level.  Once it is created, in order to conduct a business, you will likely need a business license.

The rules and requirements for business licenses are governed at your locality level which is the county or city where you will be conducting business.  Most localities require that a business license be obtained before any for profit business activity is conducted so check with your area as soon as your LLC formation has been completed.

A business license is typically obtained by completing and filing an application containing the necessary information about you, your limited liability company and your business activity.  There is usually a minimal fee and in some counties, you may be assessed a tax on the value of your business property each year.  This ta is usually minimal and in some cases there are certain value thresholds that must be met.  Your locality should have a detailed web page on their website about business licenses as it is a very popular topic.  If you are going to operate using a name other than your LLC name, your locality may require additional name use filings.

For more information on forming an LLC, check out other posts under this category.

Many existing businesses expand by starting a joint venture or business arrangement with another business or person.  If the arrangement involves an ongoing activity, one of the best methods of creating a structured joint venture is by creating an LLC to house the venture and using the LLC governance processes to create the parameters and responsibilities of the joint venture parties.

Without an LLC, you need to rely on addressing all matters in a general contract.  A limited liability company provides an automatic mechanism for handling ongoing business interactions and activities among several parties.  Because an LLC is subjected to very little formalities and bureaucracy, you can tailor the governance and rules for your particular business transaction.

Also, because the taxes are pass through, you can accomplish the creation of a customized joint venture arrangement without having to worry about additional tax burden or complexity. You can form a limited liability company quickly and should do so prior to starting any joint venture activity.

This is a pretty popular question asked by existing corporation businesses.  The LLC is a much simpler entity to maintain and it offers a lot more flexibility when it comes to structuring ownership and management of a business.

Some states directly address this question. In these states the laws actually have a method for converting an existing corporation in that state into an LLC.  This is usually done with the preparation and submission of certain filing documents with the state corporation agency.  The specific details are outlined in these legal provisions so in order to do this properly, please consult a local attorney.

If there is no LLC conversion in your state, then there are a few other ways to accomplish this.  The first one is to form an LLC and then merge the corporation into the new limited liability company.  The merger process is addressed in the corporate and LLC statutes.  This process can get technical so it is always advised to get the help of a business lawyer.

Another option for how to become a LLC from a corporation is to simply create a limited liability company and transfer all the business assets from the existing corporation to the newly created legal entity LLC.

In any case, when you are switching legal entities for an existing business, there is going to be a transition process.

This is a tricky question because there is always the interplay between the liability protection afforded to an LLC officer under the limited liability company laws and the general law that requires that you be personally accountable for your actions.

Making decisions in a business is difficult.  You need to decide on things when you may not have complete information and you may make decisions that may ultimately prove to not be the best one.  The law acknowledges this and so generally does not hold an officer or a manager personally liable for the acts made on behalf of the business AS LONG AS the person acted reasonably and did his homework when making such decisions.

This is a standard of care that is imposed on those who run a business which benefits others (like the other members) and the specific standard actually differs based on your state.  Some have a very low standard while others impose stricter requirements.  However, the general concept is that you should “mind the business” when serving in your officer role.

Gather all the available information you need in any business situation and take the time to review it.  Consult with your employees or advisers if need be. Spend the time to think through each business decision and always ask what is in the best interests of the LLC business.  If you maintain this standard and engage in some diligence, the LLC liability protection laws should protect you.

One additional protection you could ask for before serving in an officer role is an indemnity agreement where the LLC business will agree to cover your personal liability if one ever came up.  Another layer of protection is requiring a director and officer insurance policy to cover you.

Now, if you engage in unlawful or illegal conduct or you make decisions that are clearly in your interests but not the interests of the LLC business, you could be found personally liable.

In every state in the US, the state legislature has adopted an entire set of laws governing the limited liability company in their state.  These laws are generally incorporated into one Act and so they are quite easy to find.

In a great majority of states, the name of the Act is the [State] Limited Liability Company Act so for example, the Virginia Limited Liability Company Act or the Georgia Limited Liability Company Act. But, in a few states, the LLC laws have a different name.  For example, in California the LLC act is called the Beverly Killea Limited Liability Company Act.

The best way to find these on the Internet is to look first search for your states statutes.  Type “Illinois statutes” into Google.  You should find a database with all the laws for your state.  From there, look for a search button where you can search “limited liability company.” This should take you to the section with the LLC laws.

Most LLC laws are contained either next to or within a state’s corporation code so if you have trouble searching, look at the table of contents of index and find Corporations, Limited Liability Company or Business Entities.

When forming an LLC, each state charges a filing fee to process a formation filing. This fee can vary by state where some charge as little as less than $50 and some charge as much as $600.

Aside from the filing fee, a few states require post formation publications in newspapers.  These states include Arizona and New York. Illinois also has a local county filing and the local county or city may charge a minimal fee.

Each LLC also is required to have a registered agent.  If you meet the requirements to serve as the registered agent and you are willing to do so (which means your name and address become publicly affiliated with the LLC and a part of the public record), there is no additional fee.  However, if you choose to get a registered agent service, you will pay an additional annual fee for this (usually less than $200 a year).

Those are the standard fees generally applicable to forming an LLC.  After formation, most states charge an annual fee to maintain the registration.  This fee is usually between $25-$200 but in some states like California ($800), there is a larger fee.

If you want to see a checklist for a limited liability company, I have written an earlier post with one.

Related Blogs

• Related Blogs on Forming an LLC
• 6 Ways to Prepare Your Business for Disaster
• Your business should be an LLC filing as an S-corp
• Yes, you need an operating agreement for your LLC. Part #1
• Forming an LLC site (66 pages of unique content)
• Why You Are Crazy To Operate Any Business Without Using An LLC

An officer is usualy a person appointed with a specific operational rolse in a busines.  Officers generally include President, Secretary and Treasurer but a business can create any officer title role and defined the rights and reponsibilities of the rols.

The LLC laws do not require that a limited liability corporation have LLC officers so they are not strictly required in order to have a valid LLC.

HOWEVER, I alwasy recommend that every LLC have at least the officer roles of President and Secretary.  This is because many third parties are going to look for these traditional officer roles when determining who has the authority to enter into business contracts and transactions.

Now,  a member of a member managed LLC could sign as a “Member” or “Managing Member” and this would be legally sufficient but the problem is that the other party may be confomfortable with this.  They are used to seeing a traditional officer sign contracts- the President in a small company or a Vice President in a larger one.

Even banks, look for Presidents and Treasurers or CFOs to be noted on authority documents.  Also, many times a government entity or other party may ask for the Secretary to certify a certain statement or filing.

Instead of having to deal with having to explain your authority structure for your limited liability corporation, just appoint these officers in your LLC Operating Agreement and move on with your business.  Believe me, appointing officers is easy and will result in you avoiding delays later.

Depends on whether adding the extra layer of manager managed will serve an important business need for your particular circumstances.

One of the helpful features of a company LLC is that you can separate the management of the business from the owners.  This is different from sole proprietorships and general partnerships.

Now, the limited liability company does allow a similar structure and gives limited liability – this is the member managed structure and it means that every member has the authority to manage the day to day of the company and to sign contracts and enter into transactions on behalf of the LLC business.  If you only have one member (single member LLC) or two members and both will be active, this is the simplest structure.

One the other hand, if you do not want one of your members to have this kind of power, you should consider manager managed. This protects both you and the business.

Also, most companies that have more than two or three members will choose manager management as this mimics the corporation management structure.  Here, members by virtue of being a member does not have LLC authority unless they have also been elected to be a manager.

It is an extra layer of management but is extremely helpful when there could be”too many cooks in the kitchen” as a manager managed structure imposes a meeting and approval process so managers act as group similar to the way a Board of Directors operates in a corporation.

The LLC allows you to put in place whatever checks and balances you desire based on your company LLC situation.

Another helpful post can be found here: member managed LLC v. manager managed LLC

There is a common question among LLC business owners as to whether a single member LLC operating agreement is even needed or desirable for a single member LLC.  After all, why have requirements where a sole member has to abide by processes and rules to get agreement to and from himself or herself.

Well, the answer to this is because the way the limited liability company laws are set up, a single member LLC is still a separate legal entity from its sole owner.  As a result, it needs to have its own personality and be its own person.

If there is no evidence like a single member LLC agreement and other paperwork, then there is a chance that a judge in a lawsuit may say that the single member LLC was never really honored by the owner as an independent entity running a business.This is bad for a reason:

One of the biggest vulnerabilities of a single member LLC is that someone suing it may argue that the single owner should be personally liable for the liability in question. This is called piercing the protection veil.  While there is not a lot of published case law evidencing when someone has prevailed with this argument, this concept has been well developed in the corporation case law.

Given that corporations have similar asset protection laws, it is a recommended action to see what preserves protection in the corporate arena and apply it to the single member LLC.

The better decision is to have a single member LLC operating agreement and for the single owner to engage in simple governance with his or her LLC to clearly establish that the limited liability company exists and is the separate entity running the business.

The laws are clear that a single member LLC is a good vehicle for asset protection from creditors assuming that the creditor does not require that the member sign a legal agreement agreeing to personally guarantee the liability in question.

The LLC Expert sells a SINGLE MEMBER LLC OPERATING AGREEMENT PACKAGE which includes a single owner specific LLC agreement form and a standard governance consent that can be used to easily maintain written governance approvals for major actions.  This can make the differece between full protection and subjecting yourself to personal liability. Click Here for More details about this package for a Single Member LLC.

Generally, when this question is asked it is two fold.  One, how are previously purchased equipment or previously incurred debt transferred to a limited liability company when an LLC is created later for a business.

Second, is it possible to not be personally liable for that debt after the transfer?

Question #1:  Yes, you can transfer any assets or debt to your LLC. You transfer assets with a document called a Bill of Sale and you assign debt with an assignment of the debt contract and obligation.  The LLC needs to agree to undertake the debt obligation by having its members formally approve this transaction.  The approval should be documented with a written resolution or consent.

Question #2: No.  Once you personally agree to an obligation, you cannot later get rid of that personal obligation by transferring he obligation to an LLC.  You remain liable.  The only way to change this is to get the other party (e.g., the lender or vendor) to agree to take you off as a liable party. In most cases, that party will never agree to this- it just does not make business sense.

The best approach is to create an LLC early and have your limited liability company be the contracting party or the borrowing entity from the beginning.  Please note that many banks will not lend money to a brand new LLC with no operating or credit history so you may end up being asked to personally guarantee the loan in any event.  Banks are conservative.  It is still worth your LLC being the borrowing entity (Even with the guarantee) as this is how you begin to establish credit for your LLC business.

Learn more about the limited liability company at The LLC Expert.

The answer to this depends on how the limited liability company is taxed. If taxed as a partnership/pass through (which is the default taxation for an LLC), owners of an LLC that also work for that limited liability company are generally not seen by the Internal Revenue Services as employees.

Rather, owners are categorized as self employed.  All income earned by the LLC business is seen as self employment income and each member is required to pay and withhold self employment taxes related to that income with the IRS. There is a maximum amount subject to some of the tax.  Now I have never found anything that prevents setting up an employment relationship but many accountants have told me that this has caused issues and resulted in having to unwind it to the self employment structure.  So, check with your accountant on how his or her recommendation as he or she is the person who will be preparing your tax returns and employment tax forms.

If the limited liability company is taxed as a corporation, then owners can be employed by the LLC entity and are treated like employees for all purposes of IRS taxes.

Regardless of tax structure, owners can be paid for their contribution to the LLC and can receive employee type benefits.  However, you should seek the advice of your tax accountant to determine the best way to structure the relationship between a member and the LLC.

A quick side note. There is technically no such thing as llc incorporation.  Unlike corporations, LLCs are organized or formed as opposed to incorporated. The result is the same though.  Each legal entity once created is a separate legal entity with its own powers, characteristics and limited liability. So, just to be precise, instead of llc incorporation you have llc formation.

This is the most common question we get at The LLC Expert- What is an LLC?  Then, How Does an LLC Benefit Me?

I think it is important for any new business owner to fully understand the importance of proper business and protection planning.  Starting a business off properly with an asset protection legal entity is the first key step.

I have written a prior answer post explaining briefly What is a limited liability company LLC. But if you want more information about this and to know exactly how the LLC benefits you, I have also written a Report with more detailed information- see below to get it.

It is smart to understand what the limited liability company LLC can do for you and your business.  Read my Report which explains this in plain English.  Go ahead and get it- its totally free on The LLC Expert website:

You can get instant download to the Free Report by clicking here.  FREE LLC REPORT. You may need to scroll down to the bottom of the page to find the Free Report Box where you can get the Report.

Using an LLC form your business is really about asset protection.  It really does not matter how much money your business is making, you can always be sued and lose lots of money and assets.

A recent example I am aware of involves Susan Jackson.  She started a business selling marketing consultation services to businesses looking to sell online.  She was only in business for 4 months and was not making any profits yet.  She had signed up less than 10 customers.  4 months into her business, she gets legal papers delivered from an unhappy customer suing her personally for allegedly providing unlawful advice that caused the customer damages in excess of $30,000 dollars. If Susan had a limited liability company, it would be her business being sued not her personally.

Now, there are extreme cases of the above example as well.  Some sole proprietors have found themselves liable for million dollar obligations that there insurance policies do not cover.  In these cases, the business owner has to sell his home, and liquidate his personal savings for business related obligations.  The LLC can help avoid business problems becoming personal ones.

Another common example is the trigger happy new business owner who signs onto long term contracts committing to substantial orders for supplies or products he is going to use to make his business successful.  If his business is a sole proprietor business, he is on the hook personally for these contracts.  On the other hand, if he forms an LLC and the LLC enters into the contracts, it is the LLC who is the business and is on the hook for contractual obligations.

Many mistakenly think the decision of whether to form an LLC relates to the size of the business.  This is wrong.  It relates to protecting what you own (your home, savings, cars, jewelry and other valuable assets). Also, starting a limited liability company later will keep you exposed to everything that happened before.  Liability protection only starts on the day the LLC is formed.

If you own real estate in your own name and want to transfer it to a real estate LLC in order to benefit from the limited liability protection afforded by a limited liability company, you will need to transfer the property in accordance with the real estate laws in your state.

This is usually done with a deed.  The most common way to do this when you are both the owner of the property and the owner of the real estate LLC is to use what is known as a quitclaim deed.  A quitclaim deed basically states that you are transferring whatever ownership interests you have in the property to the LLC.

The form of the deed will need to contain specific language that can vary based on your state.  Accordingly, you can seek the help of a local real estate attorney or find a state specific form to use if you do it yourself.  If you cannot find a form, then go to your local county and search the records for actual quitclaim deeds that were filed there.  You should be able to to find several basic forms used.

When you transfer the property to your real estate limited liability company, there may be some fees charged by your locality so call your county for specific fee details.

Your LLC should execute a resolution or consent agreeing to take on ownership of the property.

Finally, one issue that is common in this area is whether there re any issues if the property is subject to a mortgage.  If you are a borrower on a mortgage/deed of trust with a bank for the property, you need ro read your loan documents to see what conditions, limitations or restrictions they may have on the ability to transfer the property to an LLC without paying the loan off.  There is often a clause called a Due on Sale Clause which you should be aware of.If you own 100% of the LLC, there may be ways around this so check with your local real estate attorney for advice.

There are many benefits to you when forming an LLC for your business. First and foremost is limited liability protection. By running your business in a separate entity such as a limited liability company, you are not personally liable for any liabilities, problems and lawsuits that arise due to your business activity. This is a huge benefit.

Many non-LLC owners are shocked every year when they get personally sued for business problems and find that they need to sell their personal assets (like their home, car, other property) or lose their personal savings to cover any resulting liabilities.

Other benefits of forming an LLC include: tax benefits and choices, a more professional and trustworthy business image, lower risk of tax audit, a simple to operate business vehicle, a legal entity that makes it easy to take in investors or other members.

If you are interested, The LLC Expert offers an excellent formation and education service for forming an LLC: The LLC Expert Formation and Liability Protection Package.

A limited liability company agreement is the operating agreement for your LLC business.  It is not meant to be signed once and then forgotten.  Ideally, you should amend and update it anytime there is a change that is required to be reflected in the provisions of the agreement.

There are two ways to update an operating agreement.  This first is with a written amendment.  These are tricky and you should make sure the amendment refers to the underlying limited liability company agreement and has clear language as to what has changed or updated from the old one.  The most important requirement is that the amendment be signed by EVERY member who is a member at the time of the amendment.

The second way to update an LLC agreement is to just replace the old one in its entirety with an updated one that reflects the current status of the LLC. This replacement would be officially called a RESTATED limited liability company agreement and, somewhere close to the beginning of the document, there should be language that states that the document is replacing, in its entirety, the Operating Agreement of [name your LLC], dated {insert date of old agreement].

Lastly, you need to keep all old and current records of any documents that are or were part of the LLC agreement of your limited liability company.  You may need to show which document and/or amendments were in place at different periods of time.

Please get the help of your attorney when first doing these as it is important that you follow the required processes of your LLC, get the necessary votes. and prepare and execute the right documents when updating your limited liability company agreement.

Yes, a limited liability company can be formed for any lawful business purpose or purposes.  So, under the LLC laws, there is no restriction limiting an LLC to only doing one business activity.  One LLC can run both a consultancy and a store for example.

Having said this, many entrepreneurs form a separate LLC for each business.  This is because everything owned by each LLC will be subject to the business risks of all activities in the LLC.  For example, if a real estate investor owns three properties and all of them are owned and managed by one LLC, then if a problem with one property arises, all of the properties are at risk.  Say, a tenant slips and falls in one property and gets a large judgment beyond the insurance limits.  In this case, the other properties are reachable by the tenant to fulfill the judgment.

Now, some LLCs are formed as holding companies to own interests in multiple businesses.  This is another great method.  The holding company LLC only owns stock or LLC interests in other businesses so is never at risk for business problems.  Under it are other LLCs or corporations which run the multiple businesses.

Bottom Line.  Yes an LLC can run more than one business but if may be wroth thinking about whether the added liability protection for each business is worth the small costs to form multiple LLC entities for your businesses.