Ultimate LLC Compliance Guide. Michael Spadaccini
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To form an LLC, you file articles of organization with the secretary of state or equivalent department. See the State Reference Information on the accompanying CD for contact information for the appropriate department. With the articles, you must also submit a filing fee, which differs by state.
Use the Secretary of State’s Model Articles of Organization
The best place to start in preparing your articles of organization is to visit the secretary of state’s web site in the state in which you want to organize. In most cases, these sample articles will be all you need.
▼ Expert Tip
Don’t file organization papers in the closing weeks of a fiscal year, such as in the last weeks of December—you may be required to file tax returns for the entire year. Wait until January 1 to file your organization papers.
In the past few years, many states have offered fill-in-the-blank articles. The use of such forms is now mandated in several states, most notably Nevada. Bear in mind that fill-in-the-blank forms are going to offer only the minimum. If you have additional clauses that you wish to add, such as additional classes of ownership or specific limits on the liability of officers and managers for actions on behalf of the LLC, you’ll need to add those clauses on continuation pages.
▼ Expert Tip
You can usually pick your date of organization. If you would like a special date, such as January 1 or a birthday, contact the secretary of state’s office in the state in which you intend to organize. Almost all states will let you designate a special date of organization when you file.
Expedited Service May Be Available
If you want to form your LLC immediately or at least very quickly, some states offer expedited service available for an additional fee. Delaware and Nevada, where organization is a cottage industry, both offer expedited filing. Nevada offers a 24-hour service for an additional $100. Delaware goes further: it offers the fastest organization in the country, with 24-hour service for $50, same-day service for $100, two-hour service for $500, and one-hour service for $1,000.
WHAT INFORMATION SHOULD YOU INCLUDE IN YOUR ARTICLES?
Your articles of organization should include all the required items listed above, as well as any of the optional items that are required by your state. Next, determine how much information you wish to make public.
Don’t Disclose the Unnecessary
As a general rule, don’t appoint initial members or managers in your articles of organization—except if the state requires it, such as Nevada. And, generally, I recommend that LLCs be operated as manager-managed LLCs: that’s a theme we’ll talk about throughout the book. Managers can easily be appointed immediately by the organizer after filing the articles of organization. So, if it’s optional, don’t name managers or members in the articles. Articles of organization are a public record and available for inspection. As a result, many business owners wish to reveal as little information as possible about their LLCs in the articles, relying instead on the operating agreement and LLC minutes to store this information. You should always strive to operate your LLC as discreetly as possible.
It is virtually impossible to hide the identity of your LLC managers, however. Even if the articles do not name your managers, most annual reports to the secretary of state will require disclosure of this information. Annual reports are also public records.
▼ Online Resource
You will find links to the web sites of the secretaries of state for all 50 states at www.learnaboutlaw.com.
▼ Expert Tip
Never disclose the names of the owners of an LLC if it’s not required. Although it happens only rarely, sometimes aggressive lawyers suing a company will sue the company’s owners in order to harass and gain leverage—even if the owners have done nothing wrong.
HOW DO YOU AMEND YOUR ARTICLES?
Most changes to the articles of organization require filing an amendment to the articles. The amendment process satisfies the requirements in your state’s statutes. Owners have no vested right resulting from any provision in the articles of organization, including provisions pertaining to the management, control, capital structure, dividend entitlement, purpose, or duration of the LLC. So long as you follow the proper procedures, you may amend your articles.
For certain minor changes to the articles of organization, the organizer or appointed manager may sometimes amend the articles of organization on his or her own. These changes include the following:
▼ Good to Know: What Entity Is It?
Two brothers decide to form an LLC in order to operate a pool cleaning business. One of the brothers mails the articles of organization to the secretary of state’s office, but the articles are lost in the mail and never filed. They discover the problem months later, after the business is going strong. What entity did they form? It’s not an LLC, because the papers were never filed. They entered into a joint enterprise for the purpose of pursuing profit. Thus, the entity they formed is a partnership.
• Extending the duration of an LLC formed for a limited (not perpetual) duration
• Deleting the names and addresses of the initial managers
• Changing the address or name of the registered office or registered agent
• Changing each issued and unissued authorized share of an outstanding class to a greater number of whole shares, if the LLC has only shares of that class outstanding
• Changing the name to substitute the term “LLC,” “LC,” “Limited Liability Co.,” or other LLC indicator
However, once an LLC has issued ownership interests to any persons, all changes to the articles of organization except the minor ones noted above require the approval of the managers (if the LLC is manager-managed) and the members. Unless a greater majority is required by the articles or operating agreement, a simple majority of any quorum is sufficient to authorize an amendment. (A quorum is the minimum number of managers or members who must be present to transact business.)
Any amendment that would affect a particular class or series of ownership interests will generally require that owners of that class, the owners affected by that change, have the right to vote on the change. This is true even if the class or series of ownership interests is otherwise nonvoting. This situation would be rare, encountered by more sophisticated LLCs. This right would arise in the following situations, for example:
• Reclassifying a class or series of ownership interest into a different class or series, as when an LLC seeks to extinguish a preferred class of ownership and convert the preferred holders into ordinary members
• Changing the rights or preferences of any class of ownership, as when an LLC might seek to eliminate or change the dollar amount of a dividend preference enjoyed by a class of holders
To be legally effective, articles of amendment must be filed with the secretary of state in the same manner as the articles of organization were filed. Articles of amendment should include the following:
• The name of the LLC
• The full text of each amendment adopted
• The procedures to be followed to implement the change, if the amendment provides for the exchange, reclassification, or cancellation of issued shares
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