Though forming a limited liability company (“LLC”) may seem like a relatively straightforward process, there is a lot more than meets the eye. Not only are there statutory and regulatory mandates, but there are also non-mandatory documents essential to ensuring the success of the business and its members.
Before filing any forms for an LLC, it is a good idea to search the potential name on the Secretary of State’s website. Doing so allows individuals to see if their business’ name is already in use, or available for use. If you know that you want to form an LLC and know the company’s name, but will not be able to file for a little while, there are also forms available to reserve the name for future use.
The next step in forming an LLC is to file the Articles of Incorporation. This document can be found on the Secretary of State’s website in virtually every state. On this document, the filer will need to disclose some basic information such as the member names and addresses. Of
note, you will also need to choose and NAICS code. The NAICS code is a six-digit number used to categorize your business. It is important to choose the best, most applicable code as, some industries offer tax incentives. The applications for these incentives, most usually, require the applicant to provide proof that he or she works in the industry by disclosing the LLC’s NAICS code. Failure to properly categorize your business could result in missing out on these incentives. Additionally, the Certificate of Organization requires you to appoint an Agent for Service of Process. Essentially, this person serves as the LLC’s main contact. If there is any important mail, or if the LLC is served with a lawsuit, the necessary documents will go to the Agent.
After forming the LLC by filing the Articles of Incorporation, it is also important to get an
employer identification number (“EIN”). This is a nine-digit number assigned by the Internal
Revenue Service (“IRS”) to identify the tax accounts of employers, and companies that do not
have employees, for tax reporting purposes.
Finally, after forming the LLC, each business must file an Annual Report with the Secretary of State. These Reports are due between January 1 and March 31 of each year. The reports list any changes in the LLC’s ownership, contact information, and agent. Of note, failure
to file the Report could cause your LLC to be dissolved by the State.
Though not legally necessary in most states, an Operating Agreement is a very important part of every LLC formation.In every state, there are default statutes that, in the absence of an Operating Agreement, describe what will happen to the LLC in certain circumstances. For example, the default statutes may require that to add a new member, all the existing members must unanimously consent to the appointment. In many states, the default rule is that all LLC members, regardless of their ownership interest, share equally in the LLC’s profits.
While some default provisions may be beneficial, and align with your interests, others may not – this is where the Operating Agreement comes into play. As the name suggests, the Operating Agreement, among other things, describes the LLC’s operations. This not only includes some of the day-to-day activities, but what happens to the LLC in the event of a sale, bankruptcy, and any other event.
It is important to write an Operating Agreement as the Court looks to the Operating
Agreement, and not the default statutes, when there are disputes. However, in the absence of
an Operating Agreement, the Court looks to these default statutes. For example, the default rule could be that LLC owners divide all profits equality in the sale of a business. If there was no Operating Agreement one member could own 80%, and the other owns 20%. Here, each
member would still receive 50% of the profits in a sale. In the same example, if the Operating
Agreement provided that each member received his or her pro rata share in the even of the
sale, the 80% owner would receive 80%, and the 20% owner would receive 20% of the profits.
It is also important to write an Operating Agreement, and it is a good idea to have an
attorney write the agreement, because if you forget to include a provision, any applicable default rule applies. If everything in the Operating Agreement, and elsewhere, points to the fact that the profits following a sale are to be divided based on each member’s ownership interest, but this is not mentioned in the Operating Agreement, the default rules will most likely apply.
Though the process may seem relatively easy, forming an LLC is not as simple as it may seem. There are numerous rules, regulations, and procedures to consider – not to mention the fact that you would want your business run the way you want it to be run. If you are considering forming an LLC it is always a good idea to contact an attorney.