Limited Liability Company Laws

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

Creating and operating a limited liability company requires strict compliance with the laws of the state where you principally start and conduct the business. Most jurisdictions throughout the country impose similar requirements on members and LLCs. However, states have full authority to amend their laws or to impose regulations that are not common among the other states.

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Foreign LLC

A state views all LLCs created in another jurisdiction as foreign. A foreign LLC that conducts business outside of its own state must register in the foreign state in order to avail itself of that jurisdiction’s court system. Registration requires the LLC to deliver an application for a certificate of authority with the foreign jurisdiction’s secretary of state. The application includes the legal name of the LLC, the state of its creation, and the addresses for its principal place of business and the agent with authority to receive legal documents. An LLC may conduct business in a foreign state without registering; however, you will not have access to that jurisdiction’s courts in the event you require court intervention to settle a dispute with a resident of that state.

Member Contributions

LLC members may contribute tangible or intangible property, past or future services, promissory notes or other legally binding agreements to the LLC. However, states do not require a person to make a contribution as a prerequisite to gaining admission to the LLC -- unless the operating agreement of the business requires it. In these cases, the business and its owners have a legal claim against you for any contribution you fail to make. A lender that extends credit to the LLC and relies on the promise of future member contributions as a factor when evaluating creditworthiness can sue individual members whose failure to make the contribution causes the LLC to default on repayment.

LLC Management

Most jurisdictions entitle LLC members to participate in running the business. This provides a member with the right to vote, manage the LLC’s affairs, and obtain all books and records that the LLC maintains. However, an operating agreement may restrict a member's management authority if it requires the hiring of outside managers to run the daily operations of the business. In these situations, members retain the right to vote on firm business and oversee the manager selection process.

Federal Taxation

An LLC must also adhere to the federal tax laws. The IRS allows an LLC to elect partnership or corporate tax treatment, and single-member LLCs to elect sole proprietorship or corporate tax treatment. Prior to an election, single-member LLCs automatically receive sole proprietor tax treatment and all other LLCs receive partnership treatment. If you prefer a method of taxation other than what the IRS automatically designates, you can make an election on IRS Form 8832 upon formation. Once you make an election, it is binding on the LLC and all members for a minimum of 60 months before you can make another change.