LLC Business Partnerships

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

Entrepreneurs who invest in joint ventures may choose to create a limited liability company for the business in any of the 50 states and the District of Columbia. Using an LLC structure provides each member with protection from personal liability for business activities. Although the regulations that govern LLCs are fairly uniform across all jurisdictions, you must adhere to the specific laws of the state you choose to create the LLC in.

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LLC Creation

The laws of the jurisdiction in which you decide to create the LLC will require you to deliver to the secretary of state, or its equivalent, a certificate or articles of organization. Commonly, the information the certificate requires includes the business name of the LLC, the address of its main office and the name and address of an agent who has authorization to accept legal service of process. Generally, the appropriate office will provide you access to a database where you can search available business names not already in use. If at any point the information you provide on the certificate changes, you must amend it and deliver it to the appropriate office.

Operating Agreement

Most LLCs with multiple owners draft an operating agreement that is binding on all members. Generally, the provisions of the agreement define the authority each member has in making business contracts, the allocation and timing of profit distributions, enhancements to the state required fiduciary duties of members and the number of member votes necessary to make fundamental changes to the business, including amendments to the operating agreement. Most states do not require you to draft an operating agreement; however, in the absence of one, the state imposes default rules and minimum standards of conduct and authority.

Owner Liability

The members of an LLC are not personally liable for the actions of co-owners that are beyond the scope of normal business practices or for the debts and obligations of the LLC. Members who act beyond the scope of their authority in creating an obligation of the LLC will be personally liable for the amount of loss or damage the business suffers. If the LLC elects partnership tax treatment, co-owners are solely responsible for paying the tax on their share of profits. Partnership taxation requires each member to include on a personal income tax return their respective share of earnings. The failure of one member to report LLC earnings on a tax return does not require other members to pay the deficiency.

Owner Management

By virtue of acquiring a membership interest in the LLC, all owners have equal rights to actively participate in managing the business. However, the operating agreement may restrict the management activities of a member by requiring outside employees to hold all management positions or by assigning management roles to specific members. In these cases, all members retain the right to oversee the member-manager’s performance and have an equal voice in hiring decisions.