Limited liability companies are a popular type of corporate form in the United States.
They offer flexibility to members, in determining how to structure and run their company.
A limited liability company is created when its members file a “certificate of formation” with the Secretary of State in the state where the company is being created.
The certificate of formation contains basic information about the company, such as:
- company’s name
- company’s registered agent and address in the state
The certificate of formation may contain additional provisions, such as identity of members and managers.
A fee is charged for filing a certificate of formation. For example, in Delaware this fee is $90.
Basic forms of certificates of formation are freely available online from the Secretary of State websites. For Delaware: LLCFormation.pdf (delaware.gov)
Members are the owners of the limited liability company.
A single member can create an LLC by himself or herself.
In some companies, members will also manage the company, in what is known as “member-managed companies”.
In other companies, members may or may not be directly involved in running the company, in what is known as “manager-managed companies”. Typically one or two members will be directly involved in running the company (and they will be the “managers”), while other members will have a passive, pure-investor role.
A key role for members is to review and approve important matters affecting the company, such as:
- electing managers
- overseeing managers
- determining manager’s compensation
- reviewing performance and financial statements of the company
- defining strategic direction
- fundamental changes in the life of the company, such as mergers or liquidation
- changes to the LLC agreement
- any matters identified by the LLC agreement as requiring member approval
Limited liability company agreements
Limited liability company agreements (also known as “operating agreements”) are made between members, to define key points about the members’ rights and obligations and the management of the company.
Although members may “sign” the LLC agreement (just like any other contract), it is not necessary for them to do so. Members will automatically be parties and bound by the terms of the LLC agreement even without signing them.
A member (or potential member) should pay close attention to the LLC agreement’s terms, which will define important rights and obligations of the members (such as voting, dividends, or exit rights).
Typical provisions of LLC agreements are:
- voting rights of members
- types of transactions requiring members’ approval (such as merger, sale of substantial assets, change of company’s activities)
- dividend distribution
- how members can exit the company
- appointment of managers
- duties of managers
- indemnification of managers
Limited liability of members
Members are not personally liable for the company’s debts or obligations. This concept is known as “limited liability” of members, that is, members’ liability is limited to the contributions they made to the company, which is the maximum loss they can suffer.
Members enjoy this protection, like shareholders in a corporation.
In exceptional circumstances, members can be liable for the company’s debts, where the company is not properly operated or capitalized.
Other exceptional situations where members can be liable for company’s debts are:
- where the member gave a personal guaranty for the company’s debts
- remittance of employee withholding taxes