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What is a Limited Liability Company (LLC)?

Posted by Ashleigh Beer-Vineyard | Sep 06, 2022 | 0 Comments

What is an LLC?

LLC stands for limited liability company. There are several subcategories of LLCs, for example, a PLLC is a limited liability company designed for licensed professionals, such as lawyers, doctors, architects, engineers, accountants, and chiropractors. Some states also allow for Series LLCs, which are LLCs whose articles allow for an unlimited number of additional LLCs or “series” which have separate membership interests, assets, and operate independently of one another. Laws governing the formation and operation of LLCs differ by state. The best way to determine which type of LLC is appropriate for your business is to consult an attorney. The attorneys at DZ Law are available to assist you through this process. 

Why do I need a limited liability company?

LLCs offer business owners protection from personal liability. For example, a company may and likely will accrue debts in the normal course of business. In the unfortunate case the company lacks the funds to satisfy these debts, a properly managed LLC should protect the individual owners from personal liability for repayment of the LLC's debts. 

What documents are used in the management of an LLC?

Two documents that are often utilized in the management of an LLC, are an operating agreement and a BUY/SELL agreement. Among several other topics, these documents cover the day-to-day maintenance and operation of the company and provide methods and procedures for the sale or transfer of membership interest.   

What is included in an operating agreement:

  • Operating agreements vary depending on the state in which the LLC is formed, in order to ensure compliance with state laws governing LLCs. In general, an operating agreement will address the following:

  • Name of the LLC. (It is important to ensure the LLC's name is compliant with state law, for example, the name should include “LLC”)

  • When is/was the LLC formed?

  • Where/who is the registered agent and/or registered office for the company?

  • Where is the company's principal place of business?

  • Is the LLC intended to operate indefinitely or for a fixed period of time?

  • What is the purpose of the LLC? 

  • Who are the initial members of the LLC?

  • What are the ownership interests of the initial members?

  • Provisions regarding capital contributions. 

  • Provisions regarding the management of members' capital accounts. 

  • Allocation of Profits and Losses. 

  • How will the LLC be treated for tax purposes?

  • Provisions regarding management and voting rights. 

  • How will new members be admitted to the LLC?

  • How can members withdraw from the LLC?

Provisions regarding the dissolution of the LLC 

This list is not exhaustive and simply touches on some of the important provisions that should be included in the LLC's operating agreement. Not only is it important to have an operating agreement, but it is also important that all members understand the provisions and operations of the agreement. 

Overview of a BUY/SELL agreement

A Buy/Sell agreement is an agreement between the members of an LLC that outlines the methods and procedures for the transfer of membership interests. The buy/sell agreement also addresses the transfer of ownership in the occurrence of certain events like death, disability, retirement, and divorce. It is important to have a buy/sell agreement as most businesses will add and/or remove members through the course of their operation. 

What are the two management structures of an LLC?

There are two major management structures that govern the operation of an LLC.  There is manager-managed LLCs and there are member-managed LLCs. Generally, unless the company's operating agreement states otherwise the company will be assumed to be member-managed LLC. A manager-managed LLC designates an individual or business entity to make day-to-day operational decisions regarding the company. In some cases, the manager of a manager-managed company is also a member of the LLC. In a member-managed LLC, it is the members that are responsible for the day-to-day operations of the business. The attorneys at DZ Law are here to advise you on which management structure is best for your business. 

What is an EIN and why do I need one?

EIN stands for Employee Identification Number and is issued by the IRS to businesses such as LLCs. Your business' EIN is how the IRS identifies the company. You will need an EIN to operate your business and pay applicable taxes. 

Basic Vocabulary

Capital Accounts: an account that measures the member's equity in the LLC. Each member's capital account to reflect:

  • any capital contribution

  • any distribution to a member 

  • the members' respective share of the LLC 

Capital Contribution: any payment a member makes to an LLC in exchange for LLC interests, generally in the form of new cash contributions. 

Members: the name was given to the owners of an LLC. All members will have some interest in the LLC. Interest in an LLC is measured in units. 
Membership Units: the name given to a membership interest. For example, an LLC may issue 10,000.00 membership units. If a member is a 50% owner, they own 5,000.00 membership units.

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