Ultimate LLC Compliance Guide. Michael Spadaccini
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the process of bringing a corporation to life.
The ULLCA and all LLC acts set forth technical requirements for filing articles of organization. For example, the statute requires that articles be submitted on a form prescribed by the secretary of state. In most states, the secretary of state will provide a preprinted form of articles of organization. If you choose, you may fill in the blanks and submit the articles along with the required filing fee and you have created a LLC. Bear in mind, however, that filling in blanks on a form without more information could prove costly in the future.
Articles should always be typed or printed on a computer printer and signed by the authorized LLC organizer. One signed and one photocopied version of the articles must be submitted to the secretary of state. If the articles are approved by the secretary of state, your LLC’s existence begins on the date of filing with the secretary of state. The secretary will file-stamp the photocopy of the articles and return it to you. In some states, this file-stamped copy must also be sent to the local recorder of deeds for filing. Check the State Reference Information on the accompanying CD for your local filing requirements, if you haven’t formed your LLC already. When the secretary of state or local recorder returns your articles of organization, keep them in your LLC’s minute book.
It is a crime to make a false statement in articles of organization. Read your articles carefully before filing. In addition, review the State Reference Information or contact the secretary of state’s office before filing to determine the required filing fee. In some states, a flat fee is assessed for filing articles of organization. In a very small number of states, the fee is based on the number of members or on how much initial capital is invested in the LLC. Again, the State Reference Information includes each state’s filing requirements and fees.
ARTICLES OF ORGANIZATION AND THE OPERATING AGREEMENT
What must you include in the articles of organization? As you will see, very little information is required. However, in some instances, you might want to include more information than is required. LLC statutes provide that any other lawful information may be included.
Here is a good point to note an important difference between corporations and LLCs. LLCs generally are simpler entities than corporations. They are easier to manage and operate; they tend to be run more like partnerships than like corporations. From this standpoint, they are ideal for small business. The great increase in the number of LLC formations in recent years is likely due to the simplicity of formation and operating. On the other hand, corporations are more suitable when the organizational and operational needs are more complex, as with large public companies, which may have multiple classes of stock or boards with staggered voting (e.g., where nine directors serve three-year terms and three of the nine director seats are filled by election every year). If you have an LLC already or if you are considering forming one, it’s likely because you want something simple and easy to manage. As such, it’s generally a good idea to keep your articles of organization as simple as possible. Chapter 2 discusses in more detail what you must include in your articles of organization.
Limited liability company acts also generally require that every LLC adopt an operating agreement for the purpose of managing and regulating the affairs of the corporation. If you don’t adopt an operating agreement for your LLC, your LLC will be governed by the provisions of state law. Those provisions are not likely to be ideal for your needs. So, whether an operating agreement is required by law or not, you should promptly adopt an operating agreement after forming your LLC. More specific information pertaining to operating agreement and amendments is provided in Chapter 3.
▼ Expert Tip
When you file your articles, provide your name and telephone number in your cover letter. Let the secretary of state’s office staff know that they can contact you if they have any questions concerning your filing. In some states, minor errors in the articles can be corrected over the telephone without the need to resubmit the articles.
PURPOSES AND POWERS
For what purposes can an LLC be formed? A purpose is a statement of why the LLC was formed. Once formed, what powers may an LLC exercise? Powers tell us what an LLC can do to carry out its purpose. Because LLCs are creatures of statute, the answers to these questions are found in the state LLC acts.
Under the ULLCA and state statutes, an LLC is presumed to be formed to engage in any lawful purpose unless a more limited purpose is stated in the articles. You could state in your articles that the LLC is formed to operate a retail clothing store and for no other purpose; however, it would be foolish to limit your purposes. Without any limitation in the articles, the LLC may engage in any lawful act, subject, of course, to any other statutes or laws that might impact the LLC’s activities or business. Nearly every model articles of organization provided by secretary of state’s offices offers purpose language that is as broad as possible.
With respect to LLC powers, the ULLCA and other limited liability company acts include the powers for an LLC:
• To sue and be sued in the LLC name
• To make and amend its operating agreement
• To acquire and own real or personal property, whether by lease, purchase, or otherwise, and to use or improve that property
• To sell, mortgage, lease, or otherwise dispose of all or any part of its property
• To acquire stocks, bonds, or notes of other LLCs, partnerships, or other businesses
• To make contracts and guarantees; borrow money; issue notes, bonds, and other obligations; and secure any of its obligations by mortgage of any of its property
• To lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment
• To be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity
• To conduct its business anywhere, subject, of course, to the foreign LLC statutes of other states
• To elect managers and appoint officers, employees, and agents, define their duties, fix their compensation, and lend them money and credit
• To establish benefit plans
• To make donations for the public welfare or for charitable, scientific, or educational purposes
• To transact any lawful business
• To do anything else that is not illegal and that furthers the business and affairs of the LLC
A Note on Prohibited Business Purposes
Some types of licensed professions are not legal purposes for LLCs and corporations. The practice of law and the practice of medicine are the most universal and most illustrative examples of this prohibition. Because lawyers and doctors face professional malpractice liability for errors that they make in their practices, it would be unfair to the public to allow such professionals to enjoy liability protection from such errors. The types of business purposes that a given state will allow will vary widely. For example, California prohibits use of the LLC or corporate forms for any profession that requires a “license, certification, or registration.” This prohibition excludes more than 100 professions, including such diverse practitioners as lawyers, real estate brokers, and pest control operators.
As mentioned earlier, in states that allow it (not all do), licensed professionals must use a special form of LLC, the professional limited liability company (PLLC). We discuss the PLLC in some detail in Section VI: Related Concepts. Professional LLCs are complex entities and their formation and operation should be left to the pros.
▼ Good to Know
As a practical matter, banks, suppliers, and others with whom you may need to establish