How to Use Limited Liability Companies & Limited Partnerships. Garrett Sutton
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must file a notice of such change with the secretary of state’s office.
Be sure to use resident agents that will be in business several years from now. Because they are authorized to receive notices of a lawsuit against your entity you want to be certain they appreciate the importance of this and provide you prompt notice. The last thing you want is to be sued and have a default judgment entered because you never received notice of the claim. Only use a reputable resident agent service. Expect to pay resident agent fees on a yearly basis, which can range from $100 to several hundred dollars per year, depending on the resident agent. Our company, Corporate Direct, Inc., offers yearly resident agent services for $125.00 per year. The service is free the first year with your formation.
Do LLCs/LPs have bylaws?
No, LLCs/LPs do not have bylaws. The Operating Agreement for the LLC and the Partnership Agreement for the LP serve as the bylaws for each entity.
When is an entity considered to be doing business in another state?
Unfortunately, most states do not define what constitutes doing business in their state. Instead, the question must be approached by reviewing what some states consider not doing business in their state. These include:
• Maintaining bank accounts.
• Selling goods through an independent contractor.
• Soliciting or obtaining orders, whether by mail or employees or agents, if the orders require acceptance outside the state before a valid contract is formed.
• Maintaining, defending or settling any lawsuit or other legal proceeding.
• Holding meetings of members or managers or carrying on other activities concerning internal affairs.
• Conducting an isolated transaction that is completed within a short period of time, such as 30 days, and is not a repeated transaction.
That said, California has the broadest definition of what doing business in their state constitutes. (This is so the state can collect their $800 annual fee.) As well, many banks will not open an account unless you are formed or qualified to do business in their state.
When an entity is doing business in another state, how is it registered?
Each state has its own guidelines. Generally, a filing fee and the following information is required:
• Name of the foreign LLC or foreign LP (with “foreign” meaning out-of-state).
• Date of formation.
• Nature of business and purpose.
• State of organization.
• Statement that the foreign entity validly exists in the state of organization.
• Address of the registered office and name of registered agent within the state.
• Address of the office in the state of organization or the principal office.
In some cases certified copies of the LLC Articles or LP-1 along with a Certificate of Good Standing are required. Our company, Corporate Direct, Inc., assists companies to qualify in new states. It is not an overly complicated process, but one that must be done right and on a timely basis for protection to apply.
Can family members be partners in a Limited Partnership?
Yes, but only if one of the following requirements is met:
1. If capital (i.e. investment in machinery, equipment or inventory) is a material factor, a partner must have acquired his or her ownership interest in a bona fide transaction (by gift or purchase) and must actually own or control such interest; or
2. If capital is not a material factor, the partners must have provided some contribution (services or capital) for their interest and come together in good faith to conduct a business.
How is an Operating Agreement or a Partnership Agreement enforceable?
Many states provide that such agreements may be enforced by that state’s courts. Because these agreements are considered contracts by law, when a state’s statute is silent on the issue, state law will apply to enforce binding legal contracts. Nevertheless, as is always the case, an oral agreement may be difficult to enforce.
In every business, one or more people need to take care of day-to-day operations. In an LLC, management is by managers or members. In an LP, management is by the general partner. As the rules for each are slightly different, we shall consider each separately.
Limited Liability Company Management
There are two methods of management for an LLC – member management and manager management. Under most state statutes, all members of an LLC are equally responsible for its management. Where all members are actively involved in managing the business, as is frequently the case with many smaller businesses, the LLC is member-managed. On the other hand, the LLC may select to be managed by only some of its members or by a nonmember altogether. This is known as a manager-managed LLC.
It is a requirement in most states that you identify whether you are manager-managed or member-managed as part of your Articles of Organization filing with the state. (Please note that in Minnesota and North Dakota managers sometimes may be referred to as “governors”.)
Although at least one manager (member or otherwise) is required, there is no upward limit on the number of managers you may have. To change from one form of management to the other will generally require the consent of the members (in some cases by a super majority, or greater than a majority, vote) and may also require the amendment of your Operating Agreement and possibly the filing with your state of an amendment to your Articles of Organization.
Member Management
As mentioned, in the typical two or more member active LLC scenario, several individuals have come together to make a go at a business. For each individual the business is his or her current provider and his or her future hope. As such, it is perfectly reasonable and understandable that each member wants to have a say in how the business is run.
Case Number 1 – John and Liz
J & L Consulting, LLC is operated by John and Liz. They are the only members and the only people involved in running the business, thus the only managers. In almost all cases, it would not be appropriate or fair to ask one of them to refrain from managing the LLC. It is also not really necessary to create a separate class of managers to be elected by the members. Accordingly, John and Liz decide to be member-managed, whereby each member is also a manager. In corporate terms this would be the same as agreeing that every shareholder would automatically be on the board of directors and act as an officer. But corporations do not offer such fluid arrangements, offering LLCs a distinct advantage. John and Liz like this flexibility and agree to be member managers.
Manager Management
On the other hand, not every LLC wants to - or should - be managed by all of its members. An LLC with 85 members would have a difficult time getting much done at a members’ management meeting. Realizing this, the framers provided that an LLC could be managed by one or more managers. Manager management may be appropriate when:
• Certain members are investors who want no involvement or responsibility for management of the business.
• Similarly, some members may be active in the business but don’t want to be considered a “manager.”
• The owners hire an outside management professional to run the business.
• A nonmember financier is willing to lend money but wants a say as a manager in how the money is spent.
• Like the general partner of an LP, a member may want to manage the business as he gifts member interests to non-managing