The Law & LLCs

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

A limited liability company is a creation of state law. The requirements you must meet to form, dissolve and manage an LLC may vary from state to state. However, the law of the state in which you create the LLC is the law that you must adhere to. Most jurisdictions in the country employ LLC regulations that are quite similar to one another.

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Creating an LLC

Most jurisdictions require you to draft a Certificate of Organization and deliver it to the Office of the Secretary of State to initiate the process of LLC formation. The certificate requires you to provide the address for the LLC’s office and agent, and the business name you choose. Members of the LLC must choose a name for the business that is not currently used by another business within the state. Your jurisdiction should provide you with a searchable business-name database to determine the name’s availability. Upon completion of the certificate, you must deliver it to the secretary of state’s office for filing. The LLC does not officially exist until the date of filing.

Becoming a Member

If the LLC intends on having more than one member, all prospective members must agree on who shall become a member prior to the LLC’s formation. After formation, new members may gain admission by any method the LLC operating agreement allows for. The operating agreement generally provides the number of member votes necessary to admit a new member. In the absence of a clause in the operating agreement, the admission of a new member requires a unanimous vote of all pre-existing members. A member is not required to make a contribution of property or cash to obtain admission.

Distribution Limitations

Members receive periodic distributions of the LLC’s net earnings. State laws prohibit the LLC from making distributions that leave the business with insufficient funds to pay its ordinary business debts. Distributions also cannot be made if it causes the company’s total liabilities to exceed its assets. The member or manager that authorizes an improper distribution is liable to the LLC for the amount of the distribution that is improper. However, the recipient member is also liable if she accepts the distribution with full knowledge that it is improper. Members who are due a distribution and do not receive payment have a claim against the business in the same capacity as a creditor of the LLC.

Leaving the LLC

A current member of an LLC may decide to dissociate from the LLC at any time and for any reason. However, a member who wrongfully dissociates from the LLC is liable for any damages the dissociation causes the business or other members. The member’s liability for damages is in addition to any other pre-existing debt or obligation the member has outstanding before the departure. Wrongful dissociation includes breaching provisions of the operating agreement that preclude you from dissociating.