A limited liability company, or LLC, is a hybrid business entity that combines the limited liability of a corporation with the ease of operation of a partnership. Unlike a corporation, which is highly regulated because it can raise money from the public, the operation of a partnership is not regulated beyond the default provisions in a state’s business code. Partnerships control operations by majority agreement of the partners. Typically, partnerships adopt an operating agreement that has the force of a contract between the partners. LLCs benefit from the same type of flexibility, where its partners, known as members, control operations by majority vote and by adopting a contract amongst members.
Fit your business needs with the right LLC package
Read the operational provisions of your state's Limited Liability Company Act. This statute will be part of the state's business code and can typically be viewed online or by visiting the main branch of a public library. The LLCA covers the basic formation and operation of an LLC, identifying procedures that are allowed by law and establishing default provisions that take effect in the absence of any written agreement between the members.
Determine whether the LLC will be managed by the members or by hired managers. Some states require that the LLC indicate this selection as part of the articles of organization that the LLC files to begin its existence. Even if the state does not require that this selection be made as part of the articles, it is important for planning purposes to determine how the day-to-day operations of the company will be handled. Hire management staff if the members will not be managing the company.
Select a managing member or members in lieu of hired managers. The managing member, sometimes titled managing partner, president or CEO, is the owner that will serve as part of the day-to-day operational staff of the LLC. The managing member is the key point person responsible for the management of the company.
Draft and adopt an operating agreement. The operating agreement is the principal contract between the members, or between the members and hired managers, and governs the overall operation of the company. Although a state's LLCA will specify clauses that can be legally included in an operating agreement, most states stop short of officially requiring an LLC to adopt an agreement. The operating agreement can contain any legal provision that the members want to commit to writing, and typically includes voting and meeting provisions, capital contributions, procedures in case a member wants to withdraw or sell his interest, and the roles the managers or managing members will play in running the company day-to-day. Anything that is not covered in the operating agreement is subject to the default provisions of the state's LLCA.
Vote on operational matters not covered by the operating agreement. An LLC functions like a partnership. A partnership is ultimately run by the consent of the partners, either by majority vote or by a different percentage vote as established by agreement.