A limited liability company, or LLC, is a popular type of legal entity because it combines the best characteristics of a partnership and corporation. As a result, the terms used to describe the characteristics of an LLC are often taken from both partnership and corporation law. Because each state has enacted its own LLC laws, some terms used for LLCs differ from state to state.
An LLC is created by filing a document with the state, which is typically called "articles of organization" in most states, but is called "certificate of organization" or "certificate of formation" in others. The owners of the LLC are called "members," which is analogous to the shareholders of a corporation or partners in a partnership. The LLC's existence is perpetual in duration, unless voluntarily terminated by the members or involuntarily by the state due to a failure to comply with the state's LLC laws.
State LLC laws do not require LLC members to adhere to formal management rules that apply to corporations, such as holding mandatory meetings and appointing specified officers (for example, president, secretary and treasurer) to run the corporation. LLCs are managed similarly to partnerships in that each member, like partners, can have the authority to run the business of the LLC. State LLC laws also give LLC members the flexibility to appoint one or more managers to run the LLC's business. This is a prudent option when not all of the LLC members have the expertise to operate the business. Some state LLC laws require an LLC’s formation document indicate whether the LLC will have designated managers.
All state LLC laws recognize the members’ right to make an “operating agreement” that specifies the business and financial relationship among members, and between a member and the LLC. You can include any provision in the operating agreement, as long as it does not otherwise violate the state’s LLC law. An operating agreement is commonly used to state the LLC's management structure and it is particularly useful in specifying contingency plans for when an LLC's manager cannot perform his duties.
Terms for Special Purpose LLCs
Some unique terms apply to the different types of LLCs that can be formed. For example, the term “single-member LLC” applies to any LLC that has only one member. An LLC of this type can be formed in all 50 states. A “series LLC” can separate its assets and members into one or more series, sometimes called “cells.” Each series designates its own manager and is responsible for its own liabilities -- which protects the other series in the LLC from liabilities it does not incur. Only a small number of states allow this type of LLC. Consult your state's LLC statutes for more information.