LLC Guidelines

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

Each state imposes its own requirements on prospective members who want to form a limited liability company within the jurisdiction. However, the guidelines across all states and the District of Columbia are relatively similar as a result of many jurisdictions adopting all or some of the principles found in the Uniform LLC Act.

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The first step to creating a valid LLC is to draft a certificate of organization and deliver it to the jurisdiction’s secretary of state. The minimum information the certificate must include is the business name of the LLC, and addresses of the LLC's office and the agent who has authorization to accept legal documents on behalf of the LLC. Formation of the LLC is not effective until the secretary of state reviews the certificate and files it. The secretary of state will not file any certificate until there is at least one LLC member. If no member exists at the time of delivery, the state will delay its filing for 90 days or until it receives written notification that a member currently exists.

LLC Membership

After legal formation is complete, additional members may join the LLC if the operating agreement authorizes it, or if all existing members agree. There is no requirement that a prospective member make a contribution to gain admission to the LLC. If the new member does agree to provide a contribution, it may consist of any tangible or intangible property, including money, past and future services, promissory notes and, any other legal agreement to contribute money or property. Membership interests can be gratuitous provided all other members agree. If the LLC ceases to have any members, a person may become a member if within 90 days of the date the last member disassociates, that last member agrees to admit the new member.

Member Compensation

Most LLC laws dictate that a member does not have a right to compensation for the provision of services. There is an exception for members who serve as LLC managers and for those members who actively participate in winding up the LLC in the event of dissolution. These members may collect the amount of compensation allowed for by a valid contract. However, the LLC must reimburse non-manager members who incur out-of-pocket expenses that directly relate to the LLC business.

Fiduciary Duties

State laws dictate the level of fiduciary duties each member has to the LLC and other members. Commonly, these impose the duty of due care. This requires the member to refrain from being grossly negligent in LLC business dealings, and to not recklessly or intentionally break any law that may potentially injure the LLC. A fiduciary duty also prohibits the member from engaging in activities that are disloyal to the LLC. Disloyal activities include promoting personal gain by usurping LLC business opportunities.