How Is an LLC Structured?

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

Every state in the country and the District of Columbia allows for the creation of a limited liability company business structure. Most jurisdictions impose similar regulations that govern the creation, activity and dissolution of an LLC. However, slight variations in law may exist across states that can affect the structure of the LLC.

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Formation Requirements

Most jurisdictions require you to file either the articles of organization or a certificate of organization with its secretary of state, or other equivalent office, as the initial step in forming an LLC structure. The articles require basic information such as the name of the LLC, the address of its initial office and the name and address of the person who will be acting as the registered agent for the business. The purpose of an agent is to establish a standard address for the service of legal documents. It is not necessary that a prospective member create and deliver the articles to the state. An organizer who does not have an interest in the business may complete all filing requirements to officially create the entity. The LLC is not legally effective until the date the secretary of state reviews and files the articles.

Operating Agreement

Few states require LLCs to draft an operating agreement; however, most LLCs with two or more members create this document irrespective of legal requirements. The operating agreement of the LLC expressly provides the scope of member’s relationship to the LLC and other members, limitations on the types of business transactions into which the LLC can enter, and the rights and responsibilities of all members. Each clause of the operating agreement is enforceable against all current and future members provided it is not inherently illegal.

Management Structure

The members of the LLC are the sole owners of the LLC and its assets. A member does not own specific assets in the LLC; rather, they own an interest in all of the LLC’s assets and earnings. Unless restrictions exist in the operating agreement, each member has the right to actively participate in the management of the business. This right bears no relation to the amount, if any, of property and monetary contributions the member makes to the business. This right to manage the business does not transfer to a prospective purchaser of the interest. If you purchase an LLC interest, you only have a right to a portion of the business’ earnings and asset distributions.

Business Assets

Upon formation of an LLC, any assets within the business result from either member contributions or debt financing. If the members of the LLC decide to dissolve the LLC, all remaining assets and earnings are first distributed to creditors with whom the LLC has outstanding balances, then to current and former members who the LLC owes a prior distribution. Current members can then receive a distribution of their prior contributions and a proportionate share of other remaining earnings and assets.