How & Where to Form a Limited Liability Company

by Jeff Franco J.D./M.A./M.B.A.

The limited liability company business structure is regulated by state governments, as well as the District of Columbia. As a result of many local governments adopting the Revised Uniform Limited Liability Act, most jurisdictions have similar LLC formation requirements, although there still may be slight differences between states. Contacting the secretary of state's office in your jurisdiction should be your first point of reference before creating the LLC.

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Most states require you to deliver an original certificate of organization to its secretary of state's office as a prerequisite to LLC formation. At a minimum, the certificate must include the name of the LLC, the address of its initial office and the name and address of the agent you designate to accept legal service of process. The certificate can be completed by a prospective owner or an organizer who does not have an interest in the new business. Legal formation is complete when the state files the document. Filing of the certificate cannot occur until there is at least one member of the new LLC; however, members need not exist at the time you deliver the certificate.

Operating Agreement

Most states do not require an LLC to have an operating agreement; however, most LLCs with two or more members will draft an agreement that is binding on all current and future members. Commonly, the agreements will define the scope of each member’s authority in conducting business affairs, the relationship between members and the LLC, standards of conduct the members must adhere to and the allowable methods for amending clauses of the operating agreement. Members are free to draft the agreement as they see fit, provided it does not violate any minimum requirement set by the state or alter the legal status inherent in the LLC structure.

Becoming a Member

If upon formation the LLC is to have only one owner, a person becomes a member by either reaching an agreement with the LLC organizer, or if there's no organizer, by notifying the relevant state office of the membership status. For businesses that have more than one owner, the prospective members must reach an agreement on who is to become a member or allow an organizer to make membership decisions. Once the state files the certificate of organization, additional members may join the LLC by any means allowable in the LLC operating agreement or by unanimous consent of current members.

Becoming a Manager

The sole responsibility of choosing managers to run the business rests with the members. The hiring and firing of a manager is effective only when a majority of the members agree to do so. There is no requirement that a manager be a member of the LLC; however, if a member-manager dissociates from the LLC, the member’s managerial position immediately terminates. Managers who are not members are entitled to receive compensation for their services just like any other employee. There is no requirement for the LLC to compensate a member who also serves as a manager unless a majority of members agree or the operating agreement requires it.