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LIMITED LIABILITY COMPANIES

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LAWYER AT LARGE

MICHAEL LYNN GABRIEL

ATTORNEY AT LAW

B.S., J.D., M.S.M., Dip. (Tax), LL.M. (Tax)


LIMITED LIABILITY COMPANIES

TABLE OF CONTENTS


INTRODUCTION

In the recent past, when two or more people wished to conduct business together there were only two options available in structuring the business, either incorporate and operate as a corporation or operate as a partnership. Much of that has changed, a new form of business entity has been in development in recent years. This is the limited liability company which shares the best characteristics of both corporations and partnerships.

Wyoming was the first state to create a limited liability company. The first liability company was created specifically to assist in the development of oil and gas resources. The expansion into other states and use by other industries was slow until the Internal Service in 1988 finally ruled that a limited liability company could be taxed as a partnership rather than as a corporation. As a result of this monumental tax decision, there has been an explosion in the number of states which now permit limited liability companies to be formed under their laws. To date, there are forty eight states which permit limited liability companies to be formed under their state law. Only Hawaii and Vermont had not, as of January 1996, enacted a Limited Liability Company Act.

It is very important that anyone considering the possibility of forming a limited liability company, possess a good understanding of the rights and obligations that arise from the liability company arrangement. The book strives to explain the various features of limited liability companies along with their drawbacks. This book is very easy to use. It contains the basic Articles of Organization needed to be filed in order to form the company. It also contains a basic operating agreement to cover the management of the company for its daily operations.

Limited liability companies permit persons to operate a business in a manner virtually identical to a general partnership yet with the full corporate protection against personal liability for the debts of the company. In addition, it is often cheaper to form a limited liability than a corporation because most states charge less for the filing of their Articles of Organization than a corporation's Articles of Incorporation.

This book discusses what requirements must be met to have the company taxed as a partnership. This is often the major consideration in forming such a limited liability company. As a rule, if the parties want the company to be taxed as a corporation, then it should be incorporated. Generally, only if the members actually want the company taxed as partnership should a limited liability company be formed. There is no real benefit derived from forming liability company over that of corporation, if it is going to be taxed as if it were a corporation anyway. The discussion of the respective benefits of being treated as a corporation or partnership are discussed in great detail.

This book is one in a series that have been written to help the reader cut through legal jargon and understand his or her rights. Other books of this series are:

  1. A mini-encyclopedia of law, "A COMPLETE GUIDE TO THE LAW", by Carol Publishing.
  2. A two-volume set of ESTATE PLANNING. Volume one pertains to Will, Durable Powers of Attorney and Living Will Declarations. Volume Two deals with the use of Revocable Trusts as estate planning tools.
  3. INCORPORATING A SMALL BUSINESS
  4. LIMITED LIABILITY COMPANIES
  5. BANKRUPTCY CHAPTER SEVEN
  6. BANKRUPTCY CHAPTER THIRTEEN
  7. SMALL CLAIMS COURTS
  8. FINANCIAL PLANNING ONE
  9. FINANCIAL PLANNING TWO
  10. POWERS OF ATTORNEY
  11. PARTNERSHIPS
  12. NAFTA (NORTH AMERICAN FREE TRADE AGREEMENT)

These books are different from other legal self-help books. While they explain the pertinent law, they move beyond the basics. This series is written in a very practical mode, explaining to the user how to accomplish the desired results while providing detailed forms, examples and instructions. This series offers the most user-friendly and complete books of their type on the market.


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CHAPTER ONE

COMMON QUESTIONS REGARDING LIMITED LIABILITY COMPANIES

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INTRODUCTION

This chapter is written in a question and answer format. It covers many of the most commonly asked questions regarding limited liability companies. The questions covered are answered throughout the book in greater detail. The main reason for having such a chapter is to give the user of this book a basic understanding of limited liability companies before reading the more substantive chapters.

It has been shown that when legal self-help books are presented in this format, even though it requires more work and effort to do so, the reader is able to understand and assimilate the material in a better and faster manner.

1. WHAT IS A LIMITED LIABILITY COMPANY?

The newest development in business law is the creation of the limited liability company. In operation, a limited liability company is a cross between a corporation and a partnership, both general and limited, and shares some of the characteristics of all three entities. Unlike a corporation which can have perpetual existence, some states limit the life a limited liability company to a maximum term, usually thirty years. Unlike the general partners of a partnership, the members of a limited liability company are not personally liable for the debts of the company which is the basic treatment for shareholders of a corporation or the limited partners of a limited partnership. Members of a limited liability company may agree in the operating agreement to allocate profit and losses other than in accordance with the percent of their ownership interests which is something a corporation can not do. In addition, a limited liability company may give full management and control to just a few managing members which is the same treatment that is available in a partnership.

As of January 1996, forty eight states and the District of of Columbia have adopted a limited liability company act. Only Hawaii and Vermont have yet to adopt a LLC Act. It is believed that these states will soon adopt an LLC Act so as to give their citizens the advantages of doing business in the LLC form.

A limited liability company is considered to be a legal entity which is separate and apart from all of the people who own, control or operate it. A liability company holds most of the rights of a legal person, As such, a limited liability company is capable of validly executing contracts, incurring debts, holding title to both real and personal property and also paying taxes. The attractiveness of limited liability companies stems from the very fact that they are held to be separate legal entities apart from their owners, the members, which gives LLCs unique advantages over both corporations and partnerships,

2. HOW IS A LIMITED LIABILITY COMPANY FORMED?

The steps for forming a business as a limited liability company are simple. They can be summed up as follows:

  1. Filing the Articles of Organization;
  2. Adoption of the Operating Agreement; and
  3. Issuing the membership certificates.

Once the above steps have been accomplished, the limited liability company is formed and can commence operations in its home state. If the company wishes to do business in other states, it is usually required to filed a copy of its Articles with the Secretary of State along with a form stating that it is a foreign limited liability company.

3. WHAT MUST BE INCLUDED IN THE COMPANY NAME?

A limited liability companies must have a name that denotes that it is a limited liability company. The name usually must contain the words, "Limited Liability Company" or the symbols "LLC", "L.L.C." or "L.C.". The name selected for the company must not mislead the public into believing that it is an agent of the Federal or State government. The name of the limited liability company also must not mention or suggest involvement in a regulated or licensed field unless the limited liability company actually has that license.

The main concern is whether the proposed name is so similar to that of an existing business's name so as to mislead the public into believing that it is that other company. No state will permit two businesses to have the names so similar in nature that they are confusing. To avoid the possibility of having the Articles rejected because of similarity to the name of an existing business, the persons forming the limited liability company, the organizers, should conduct a name search with the Secretary of State's Office. If the name has not taken by another company, then it can be reserved, for a fee set by the Secretary of State, for a period of time which is usually sixty (60) days.

4. WHAT IS A REGISTERED OFFICE AND AGENT?

All of the states which permit limited liability companies require that the company, in its Articles of Organization:

1. List the address of its principal place of business in the state; and

2. List both the name and address of a resident agent for the company who is located in the state.

These requirements for the listing of a resident agent and registered office are also imposed upon a business which is incorporating. The purpose behind the listing of registered is that this person is thereby authorized to receive legal process (lawsuits and official notices) against the company. This means that the resident agent is the person who is served any legal notices along with any summons and complaints filed against the company. Under most state laws, a company must have a resident agent in the state or, by default, it is agreed that the Secretary of State will serve as the resident agent. The reasons behind the requirement for listing a registered office are self-evident. The registered office is the location where the company's records are to be kept in the state. Another reason for the listing is to give notice to the world, at large, where any complaint against the can be served.

5. WHAT ARE ARTICLES OF ORGANIZATION?

In the basic sense, the Articles of Organization is an application by a group of individuals or entities for a licenseto do business as a limited liability company in the state, If the Articles are accepted and filed, in accordance with state law, the limited liability company is thereafter formed. This book contains a detailed chapter for preparing the Articles of Organization. Each state has it own minimum requirements for the contents of the Articles. This book has attempted to provide a general set of Articles that are sufficient for most states and more specific Articles when necessary. The reader should, nevertheless, familiarize himself with the limited liability law of the state where the limited liability company will be formed so as to assure compliance with the latest version of the law.

6. WHAT IS A MEETING OF MEMBERS?

Before the Articles were filed, they had to be approved and adopted. To do that, the person or persons who were to file the Articles, the incorporators, often call a meeting of potential members. At this meeting, the provisions to be contained in the Articles are decided upon. Also decided, at the meeting, is the important detail as to whether as to whether all of the members will manage the business or if the management will be through a centralized panel of selected managers. Once the Articles are adopted, they must be signed either by all of the potential members, if no managing members are selected, or all of the managing members if management is to be by selected managing members. Usually, at this meeting, the operating agreement for the company is also created and adopted.

After filing the Articles, the limited liability company exists on paper but it is not until membership certificates are actually issued will it exist at law, de jure. It is the fact that the company has outstanding membership certificates in the hands of members that is the defining characteristic behind the existence of a limited liability company, Following the filing of the Articles, the potential members of the limited liability company meet to purchase their membership certificates in the company and adopt the operation agreement. After the membership certificates have been issued, the company is then truly and fully formed.

8. WHO ARE MEMBERS?

Members are the owners of the limited liability company. Members own the membership certificates of the limited liability company and thus have the right to vote in the election of managing members or on other company business. Members are not personally liable for the debts of the limited liability company beyond the extent of their investment in the membership certificates. Members may agree to manage the company themselves or to turn the management over to a few elected members who are referred to as managing members.

In addition to electing any managing members, the members are required to vote for the following acts:

  1. any amendment of the Articles of Organization;
  2. any sale, option or lease of substantially all of the limited liability company's assets,
  3. any merger or consolidation of the limited liability company with another limited liability company;
  4. any amendment of the operating agreement;
  5. the removing and replacement of any managing member, and
  6. the dissolution of the limited liability company.

Most operating agreements for limited liability companies require that an annual member's meeting be held each year to review the business affairs and conduct of the company. The members will also, at the meeting, re-elect or replace the managing members for another year. Members are usually given just one vote equal to their percentage of ownership in the company as evidenced by membership certificates. A majority of those membership interestsvoting is needed to carry a resolution, the matter be voted upon.

9. WHO ARE MANAGING MEMBERS?

Managing members are those persons elected by the members of a limited liability company to manage the company's affairs within the scope of authority set forth in the operating agreement. The term managing members refers to all of the managing members. Managing members must be elected if the articles or operating agreement does not reserve management to all of the members themselves.

If managing members are elected, then they alone are responsible for running the day to day business affairs of the limited liability company. When the limited liability company is taxed as a corporation, the managing members are permitted reasonable compensation for their services. In small limited liability companies, the managing members often serve for free since they are primarily are there to protect their investments.

The decision to have the limited liability company managed by elected managing members is an element of corporate existence. As such, if the company also has either of the following characteristics: free transferability of its membership interests or continuity of life and then it will be taxed as a corporation and not a partnership.

10. WHAT DUTIES ARE OWED BY A MEMBER TO A LIMITED LIABILITYCOMPANY OR TO THE OTHER MEMBERS?

A member owes to a limited liability company a duty of loyalty, A member can not usurp a company benefit, that is take for himself a benefit that could go to the limited liability company. In short, a member owes to the limited liability company the right of first refusal on any business opportunities that the member becomes aware that could affect the limited liability company. For example, if the limited liability company is in the paving business, a member could not form a competing paving business and solicit business from the limited liability company's existing clients. When a member has a personal interest on a matter before the board, the member is only allowed to vote on it if:

  1. the member's interest has been fully disclosed to the board, and
  2. the contract is just and reasonable.

A member is not personally liable for the debts of the limited liability company. A member can not be sued, by members, for losses incurred as a result of the member's actions or decisions provided that they were undertaken in a reasonable and prudent manner. As agents of the limited liability company, members have the authority to bind the limited liability company by their actions. As such, members can execute contracts for the limited liability company and likewise can subject the limited liability company to liability for damages arising from their negligent or intentional acts committed on the limited liability company's behalf.

11. WHAT ARE MEMBERSHIP CERTIFICATES?

Membership certificates can be thought of as the ownership interests in a limited liability company. Every limited liability company is authorized to sell only a certain amount of membership certificates in accordance with the security law of the state where the company is formed. The purchasers of the membership certificates acquire an ownership interest in the company equal to their percentage of membership certificates to the total amount of membership certificates outstanding. Membership interest can be sold as shares in the company such as is done in a corporation or as fixed percentages such as is done in a partnership. The membership certificates used in this book are based upon the partnership format because that is the easiest form for most people to understand and to evaluate. Membership certificates may be sold by a limited liability company for money , labor , services canceled debts or for property contributed to the limited liability company. Membership certificates also be purchased with a promissory notes although, in such cases, the membership certificates is secured by tangible property.

Membership certificates can be voting or non-voting in nature. Non-voting membership certificates is usually issued by a limited liability company to raise money without giving the owner the right to participate in the business. To attract purchasers for its non-voting membership certificates, a limited liability company usually guarantees a fixed dividend payment or the right to later convert the non-voting shares into voting shares on a fixed formula.

12. WHAT IS MEANT BY LIMITED LIABILITY?

The main advantage of a limited liability company is the limited liability that it provides the owners which are called members. As a limited liability company, the most that its members can lose in a lawsuit against the company is the assets that they contributed to the limited liability company, This limited liability for members is vastly different from that of a partnership or sole proprietorship where the owners are totally liable for all debts of the business. In such an instance, the creditors of the business can seek and attach every dollar and piece of property that a partner or sole proprietor owns in order to settle a judgment against the partnership or sole proprietorship. Such personal attachment to satisfy company debts can not be done against the assets of a member.

It is to cut off this unlimited liability for the debts of the business that people either incorporate or form a limited liability company. Few people would ever invest in a business, if by doing so, they risked losing everything that they have earned or will earn in the future,

13, WHAT IS THE COST OF FORMING A LIMITED LIABILITY COMPANY?

Costs for forming a limited liability company varies somewhat from state to state. The filing fees tend to run from a low of $50.00 to a high of $500.00. As such, the cost of forming a limited liability company is no more expensive, and in many cases, it is much cheaper than forming a corporation . If an attorney is used to prepare the Articles of Organization and Operating Agreement, then the attorney would tend to charge between $500 to $1,000. This amount avoided by using the basic forms in this book which can be augmented with whatever additional clauses the parties want to include.

The cost of forming a limited liability company should be looked upon as a one time insurance premium. Once the business is formed as a limited liability company, the members are protected from individual liability from then forward for the actions of limited liability company or its employees. After forming the limited liability company, its members no longer have everything they own at risk. Peace of mind is an important consideration in addition to cost when deciding whether to form a limited liability company.


CHAPTER 2

THE LIMITED LIABILITY COMPANY

I. DEFINITION

The most recent development in business law is the creation of the Limited Liability Company (LLC). The first LLC was created in the 1970's. For many years LLC's were not popular because the tax laws subjected them to more taxation than either a corporation or a limited partnership. In 1977, the first LLC was created in Wyoming for an oil company. The company was granted a private tax ruling stating that it would be treated as a partnership. In 1980, the U. S. Treasury issued proposed regulations that stated an LLC would be taxed as a corporation because its members did not have a partner's liability for the company's debts. In 1988, the Internal Revenue Service finally issued Revenue Ruling 88-76, 19882 CB 360, stating that an LLC could be taxed as a partnership. This revenue ruling calmed concerns about forming LLC's. As a result, the number of states permitting LLC's has increased dramatically.

An LLC is a cross between a corporation and a partnership. The characteristics that are shared with a corporation or a partnership are:

  1. It bestows limited liability on its members just as a corporation does on its shareholders and a limited partnership does on its limited partners.
  2. It can provide for the free transferability of its membership interests the same as a corporation or partnership.
  3. It can provide for continuity of life after the death, resignation, expulsion or bankruptcy of a member the same as a corporation or a partnership.

In addition, an LLC may give full management and control to just a few managing members, which is the same treatment that is available in a partnership and similar to that of the board of directors of a corporation.

The following, however, are the major differences between LLC's and corporations or partnerships:

  1. Unlike a corporation, which can have perpetual existence, some states limit the life of an LLC to a maximum number of years, usually 30, after which it is terminated.
  2. Unlike the partners of a general partnership, the members of the LLC are not personally liable for the debts of the company, which is the same basic treatment as that of shareholders of a corporation or limited partners of a limited partnership.
  3. Unlike a corporation, the company does not have the corporate restrictions on financing. Example: The company does not need to create a special surplus account for distributions.
  4. Unlike a corporation, in the majority of states, absent an agreement among the members to the contrary, profits and losses of an LLC are allocated in accordance with each member's percentage of capital contributions. A few states have adopted the per capita partnership rule: if there is no agreement on decision, profits and losses will be allocated equally among members. Either method is different from that of a corporation. Division of corporate profits and losses must be based upon the number of shares that a shareholder owns in the corporation.

These characteristics are important. If an LLC has any three of them (as discussed below), it will be taxed as a corporation. Such taxation would be detrimental to members so care must be taken in deciding which common characteristics the company should share with a corporation.

The main advantage of an LLC is the limited liability that it provides its owners, who are called members. In an LLC, the most that its members can lose in a lawsuit against the company are the assets they contributed to the LLC. The limitation of liability would naturally not extend to any personal guarantees of company debts by a member. If a member personally guarantees a company loan of $100,000, the member is personally liable for the repayment. The member's liability arises not because the person is a member of the company but because the member guaranteed that he personally would repay the loan. It is immaterial that the money may have gone directly to the company. The limited liability for members is quite different from that of a general partnership where the partners are totally liable for all debts of the business. The creditors of a general partnership can seek and attach every dollar and piece of property that a partner owns in order to settle a judgement against the partnership. Such personal attachment to satisfy company debts cannot be taken against the assets of a member. People either incorporate or form an LLC to eliminate this unlimited business liability exposure. Few people will invest in a business that risks everything they have or will earn.

LLC's are relatively new and has taken time for them to catch. Even so, 48 states and the District of Columbia now permit them to be formed or recognize them. Only Hawaii and Vermont have yet to join the majority. It is expected that soon these states will also enact a LLC Act.

The fact that two states have yet not decided to permit the existence of LLC's causes a degree of concern for any foreign LLC that wishes to do business in a state that does not permit the formation of LLC's. Such a state could treat a foreign LLC in one of two ways:

  1. It could grant full force and credit to the company and permit it to do business in the state in its limited liability form in accordance with the terms of its operating agreement. Hence, members would retain their limited liability for all company debts incurred in the state (absent personal guarantees).
  2. It could treat any LLC doing business in the state as a general partnership and disregard the terms of the operating agreement where they contradict existing state law.

It is commonly felt among corporate and tax attorneys that most of the four states that do not permit their citizens to do business as an LLC will permit foreign citizens to do so. An LLC that is considering doing business in one of these three states should consult with both a corporate and a tax attorney to determine how that state would treat the company. It may well be that by the time the company wishes to do business in Hawaii or Vermont, the state may have, by then, adopted a LLC Act which settles the issue.

An LLC is considered to be separate and apart from all of the people who own, control and operate it. An LLC holds most of the rights of a legal person. An LLC is able to validly execute contracts, incur debts, hold title to both real and personal property and pay taxes. The attractiveness of LLC's is that they are held to be separate legal entities from owners, the members, which gives them unique advantages over both corporations and partnerships.

II. FORMATION

A. General

An LLC is a statutory creation. It can only be formed by strict compliance with the state law under which it is being created. An LLC just as with a corporation or a limited partnership requires a public filing of its formation documents. The filing of the Articles of Organization is required:

  1. To give public notice that the company is formed in a way that bestows limited liability on the members for the debts of the company, and
  2. To give the public notice where the company is located and who can act in its behalf.

Most states require a LLC to have more than one owner. This is a different requirement than imposed on corporations which are permitted to have only one shareholder. Several states which include Arizona, Colorado, Delaware, Illinois, Iowa, Kansas, Louisiana, Maryland, Minnesota, and Virginia permit only one person to form an LLC, but the company is not given legal effect until it has more than one member. States that require a company to have two or more members usually also require two or more persons to sign the Articles of Organization or a subscription agreement prior to filing the Articles. If a company falls below the minimum number of members for an LLC, it will not only be dissolved but it will lose the limited liability shield for its members to the extent necessary to dissolve the company. A company will be treated harshly if it continues to do business for an undue period after ceasing to have the minimum number of members. Those states that have the two member requirement use it to insure the availability of the partnership classification for tax purposes. A partnership requires, by definition, two or more persons engaged in business.

B. ARTICLES OF ORGANIZATION

Articles of Organization is an application by a group of individuals or entities for a license to do business as an LLC. Once the Articles are accepted and filed, the LLC is thereafter formed. Each state sets its own requirements for the contents of the Articles, however, they all require:

  1. A name for the company which does not mislead the public but does disclose that it is an LLC.
  2. The address of the company's principal place of business.
  3. The name and address of the company's registered agent in the state.

The requirement for listing both the resident agent and the registered office is also imposed upon a company which is incorporating. Listing of registered agent ensures that someone is authorized to receive legal process against the company. The resident agent is the person who is served any legal notices or summons and complaint on behalf of the company. A company maintains a resident agent in the state, or by default agrees to let the secretary of state serve as the resident agent. The registered office is the location where the company's authority is kept in the state. The registered office listed address gives notice to the world where any complaint against the company can be served.

Several states also require additional provisions to be included in the Articles, such as:

  1. How capital contributions will be made to the company.
  2. Whether the company will be treated as a corporation or partnership for tax purposes.
  3. Name and address of each organizer.
  4. Whether all the members or a centralized management will manage the company.

Some states such as Colorado, Florida, Minnesota, Nevada, West Virginia and Wyoming require the Articles to state if the company will continue in effect upon the death, bankruptcy or withdrawal of a member. This is a good provision, recommended to be in every operating agreement, especially if partnership taxation is sought because continuity of life is a determining factor.

This book attempts to provide a general set of Articles sufficient for most states and has provided specific Articles when necessary. The reader should, nonetheless, familiarize himself with the particular LLC law of the state where the LLC will be formed. There are possibly current changes not reflected in this text. The provisions contained in the Articles of Organization for an LLC can only be altered or changed by the filing of an amendment to the Articles. Members frequently place important management provisions in the Articles because it is difficult to amend them. The Articles contained in this book are all that are needed to meet minimum requirements under state law. In practice, the entire operating agreement or any of its provisions can be included in the Articles. Remember, once something is listed in the Articles, it can only be changed by filing an amendment.

Before the Articles are filed they must be approved and adopted. The person who will file the Articles calls a meeting of potential members where they decide what provisions will be contained in the Articles. They also decide another important detail: whether all the members or a centralized panel of selected managers will manage the business. Once the Articles are adopted, they must be signed either by all the selected managing members, or by all of the members (if no managing members are selected. Usually, the operating agreement for the company is also created and adopted at this meeting.

C. OPERATING AGREEMENTS

After the LLC files its Articles, it exists on paper; it does not exist at law (de jure) until membership certificates are actually issued. It is the fact that the company has outstanding membership certificates in the hands of members that is the defining characteristic behind the existence of an LLC. Similarly, a corporation is not deemed to be in effect until it has sold and issued stock. Following the filing of the Articles, the potential members of the LLC meet to purchase their membership certificates and adopt the operating agreement for the business. After the membership certificates have been issued, the company is fully formed.

Operating agreements are the rules for the general day-to-day management and operation of the LLC. Contained in the operating agreement are the terms of the company concerning:

  1. Capitalization of the business,
  2. Distributions made from the business,
  3. Admission and withdrawal of members,
  4. Management of the business,
  5. Fiduciary duties owed to and by the members, and
  6. Dissolution of the company.

The operating agreement is adopted by the members and thereafter can be amended only by a majority vote of the members. An operating agreement is an attempt to resolve the many areas of potential conflict within an LLC and to delegate duties and assign responsibilities. A proposed form for a basic operating agreement for use in the 48 entities that permit LLC's follows in the Operating Agreement chapter

Operating agreements can be general in nature or tailored to the needs and desires of the members. Most operating agreements contain or mention most of the issues covered in the Operating Agreements chapter. A few states do not require the operating agreement to be in writing. Only if the agreement is in writing can the actual intent of the members be ascertained with confidence.

Operating agreements are not set in concrete and, in fact, quite flexible. Members can change the operating agreements by simple amendments. The purpose of operating agreements is to establish procedures for daily administration and management of the company. As the company develops the operating agreement must be amended to meet new requirements.

As can be seen from the foregoing discussions, the steps for forming a business as an LLC are simple:

  1. File the Articles of Organization,
  2. Adopt the operating agreement, and
  3. Issue the membership certificates.

Once these steps have been accomplished the LLC is formed and can commence operations. An LLC is easier and less expensive to create than a corporation or a limited partnership provided ordinary caution and care are undertaken.

D. MEMBERS

Members are the owners of the LLC. Usually an LLC must have two or more members. Texas, however, permits a company to have only one member. Members own the membership certificates of the LLC and have the right to vote in the election of managing members. The extent of ownership interest a member has in the company is usually based either:

  1. Upon a member's percentage of contribution to the total contribution of all the members,
  2. Upon an equal division among all the members irrespective of contribution (per capita), or
  3. Upon some other agreement between the members.

Members are not personally liable for the debts of the LLC beyond the extent of their investment in the LLC. Exception: A member is personally liable for a company debt or obligation if he personally guarantees repayment.

Members may agree for all members to manage the company or agree to elect a few members to manage, who will be called "managing members." In addition to electing any managing members, the members are required to vote on the following:

  1. Amendment of the Articles of Organization,
  2. Sale, option or lease of substantially all of the LLC's assets,
  3. Merger or consolidation of the LLC with another LLC,
  4. Amendment of the operating agreement,
  5. Removal and replacement of managing members, and
  6. Dissolution of the LLC.

The term "managing member" refers to all of the managing members. Managing members must be elected if the operating agreement does not reserve the management to all of the members. If managing members are elected, they alone are responsible for running the day-to-day business of the LLC. When the LLC is taxed as a corporation, the managing members are permitted reasonable compensation for their services. In small LLC's, the managing members usually serve for free to protect their investments. Caveat: The decision to have the LLC managed by elected managing members is an element of corporate existence. If the company also has free transferability of its shares or continuity of life, it will be taxed as a corporation and not as a partnership.

Most operating agreements for an LLC require an annual members' meeting to review business affairs and conduct. The members also will elect or re-elect the managing members for another year. Members are usually given votes proportional to their percentage of ownership in the company. A majority of those membership interests voting is needed to carry a resolution or any other matter brought to the floor.

A member has a duty of loyalty to the LLC. A member cannot usurp a company benefit that could go to the LLC. A member owes the LLC the right of first refusal on any business opportunity he discovers that could affect the company. For example, if the company is in the paving business, a member could not form a competing paving business and solicit business from the LLC's existing clients. When a member has a personal interest on a matter before the board, the member is only allowed to vote on it when:

  1. The member's interests has been fully disclosed to the board, and
  2. The contract is just and reasonable.

A member cannot be sued by other members for losses incurred as a result of the member's actions or decisions provided they were reasonable and prudent. As agents of the LLC, members have the authority to bind the company by their actions. Members can execute contracts for the company and can subject the company to liability for damages arising from negligent or intentional acts they may commit on behalf of the company.

All of the states which permit LLC's hold that an assignment of a member's interest only passes financial right unless the operating agreement states otherwise. The assignee (person who acquired a member's interest in the company) only acquires the right to participate in the management of the company through a majority vote of the other members. Usually, a consensus is required.

This is important enough to repeat. The non-assigning members must agree to let the new member participate in the management unless the operating agreement states otherwise. This lack of full transferability of interest means interests do not have "free transferability." As a result, the value of the company is lessened and the company is assisted in obtaining tax treatment as a partnership.


CHAPTER 3

STEPS IN FORMING AN LLC

I. INTRODUCTION

There is no mystery or difficulty in forming an LLC. Simply speaking, an LLC is merely a license to do business in a particular manner. The articles of organization is the application for a license, and is turned into a license when accepted for filing by the secretary of state. In fact, in legal parlance an LLC is said to be "licensed to do business" once the articles are filed.

The act of forming an LLC to engage in a business is quite simple in that all that it entails is the filing of the articles of organization and issue membership certificates. The actual act of forming an LLC is no more than standing before a clerk in the secretary of state's office and having the articles stamped (it can also be accomplished by mail). The articles contained in this book are a starting point for formation of any LLC. Before filing any articles, the reader should decide any additional provisions he may want in the articles. In addition, the reader should read those provisions in the state's LLC code (available in most public libraries and state law libraries) to ensure the content of the state law has not changed.

This book provides the user with a detailed analysis of the problems, issues and procedures to be faced in the formation of an LLC. The choices required during formation of an LLC are not difficult, but they can be complex because of the myriad of options available and the particular concerns attendant to each business. A major initial decision is whether all members agree (consensus) to have the business managed by a central committee of selected members or by all the members collectively. Equally important is whether or not the company will continue in existence after the death or resignation of a member, and will an interest in the company be transferable. The answers to these three questions will determine if the company will be treated as a partnership or a corporation for tax purposes.

This book is intended for use by small businesses which ideally have ten or less members. The reason for this is that a membership certificate in an LLC is a security under both state and federal law. It cannot be issued or sold before registration with both federal and state security agencies unless it is exempt. The main exemption from registration available to most LLC's is the one involving sales to 35 persons or less who all live in the same state. All states permit LLC's an exemption from registration if its membership certificates are sold only in that state and only to less than a fixed number of persons. Example: In Delaware, membership certificates can be sold to no more than 30 persons, while in Ohio they can be sold to no more than 10. This book deals with LLC's that will not be required to register with the SEC (Securities and Exchange Commission) and have never had a public offering of securities. The requirements for security registration or security exemptions are discussed in great detail in the Security Laws chapter.

This book was written for use primarily by those individuals who seek to form an LLC to conduct an existing business or a new business involving a few close friends or family. This book must not be used if the LLC intends to raise money by selling its stock to more shareholders than permitted by state law for exemption status.

II. PROCEDURE

The steps for forming a business as an LLC are simple. They can be summed up as simply filing the Articles of Organization and issuing the membership certificates. In arriving at this result, the LLC will go through the following steps:

A. CHOOSE A COMPANY NAME

Every LLC must have a name that denotes it is an LLC and not a corporation, partnership or sole-proprietorship. As such, the name usually must contain the words "limited liability company" or the initials "LLC" or "LC." The name selected must not mislead the public into believing it is an agent of the federal or state government. The name must not mention nor suggest involvement in a regulated or licensed field unless the LLC has that license. Example: Dr. Peter Jones Medical Limited Liability Company would not be valid unless Peter Jones actually has a medical license.

In practice, the main concern is to ensure the proposed name is dissimilar to that of an existing business's name and does not mislead the public. No state will permit two businesses to have the same name or names so similar that they are confusing. To avoid the possibility of having the articles rejected because of similarity of name, conduct a name search with the secretary of state's office. If the name is available, it can be reserved for a fee for 60 days or longer. The search can be done by mail by sending a request with the name and a check for the search to the Secretary of State. The amount of fee and the mailing address can be obtained from the secretary of state's office. A name search through the secretary of state's office can require 30 days for reply. There are attorney service firms in the phone book for the state capitol that will conduct name searches and reserve names within two days for a price of $30 to $50.

If the LLC expects to be doing business in other states, it must be aware that it may have to operate under a fictitious name in those states if its name is substantially similar to an existing business.

B. REGISTER AN OFFICE AND AGENT

As with a corporation, all states that permit LLC's require the company's Articles of Organization to:

  1. List the address of its principal place of business in the state, and
  2. Register the name and address of a resident agent located in the state.

These requirements to list the resident agent and the registered office is also imposed upon each corporation. The registered agent is authorized to receive legal process against the company and is served any legal notices or summons or complaints on behalf of the company. Like a corporation, a company maintains a resident agent in the state, or by default the secretary of state serves as the resident agent. Defaulting to the secretary of state to serve as resident agent is a poor idea because service on the secretary of state usually is not relayed to the company before the time to answer has run. A judgement can be taken against the LLC before any of the members have knowledge of the suit.

The reasons for listing the registered office are self-evident. The registered office is the location of the company's books, records and key personnel. In addition, the registered office gives notice to the world at large where any complaint against the company can be served.

C. PREPARE AND FILE ARTICLES

After the proposed LLC name has been reserved, the prospective members meet to prepare and file the articles of organization. This book contains a detailed chapter for preparing the articles. Each state has its own requirements for articles content. The articles herein are a general set acceptable in most states. There are specific articles and also articles for use when necessary. The reader should, nonetheless, familiarize himself with the particular LLC law of the state where the LLC will be formed in order to assure that the law has not recently changed. The articles contained in this book are the basic ones required. They may be retyped with additional provisions. Moreover, a particular state may require additional provisions in the articles to conform to recent changes in its law.

Once prepared, the Articles are filed with the secretary of state's office. Most states require articles to be filed in duplicate and signed by all the managing members (or all the members if managing members are not selected). Therefore, three or more copies should be filed, and the LLC should receive a conformed, file-stamped copy. The filing can be made in person or by mail. Mail filing will require 30 to 60 days for return. The alternative is to use an attorney service firm. Such firms usually take about a week to get the articles returned and will charge about $50.00 for the service. If there are problems, the attorney service firm can correct them quickly.

D. PAY FILING FEES

When the articles are filed, the members must pay the state fee. Fees vary from state to state but tend to be between $50 and $500. For example, in January 1994, the fees for the following states that permit LLC's were:

Arizona$50.00

Delaware$50.00

Florida$50.00 for the first $100,000 of capital which increases up to $250 for capital over $1,000,000

Illinois$500.00

Iowa $50.00

Kansas$150.00

Louisiana $60.00

Minnesota $135.00

Oklahoma$100.00

Rhode Island $150.00

Texas $200.00

Virginia$100.00

Wyoming$50.00 for the first $50,000 of capital, $1010 for capital up to $100,000 and $0.50 for each $1,000 over $100,000

The fees for states not listed can be obtained by calling the secretary of state's office. Some states list the filing fee in their LLC Act, if so, the amount is listed in the chapter for state laws. States not listed do not publish a schedule of fees, but should be within the limits mentioned. If articles are filed by mail, a blank check made payable to the secretary of state can be sent. The secretary of state will fill in the appropriate amount.

E. ISSUE MEMBERSHIP CERTIFICATES

Before the articles are filed they have to be approved and adopted. The person who will file the articles calls a meeting of potential members who decide on the provisions to be contained in the articles. They also vote whether or not to manage as a collective group of all members or to select a centralized panel of managers. Once adopted, the articles are signed by all the managing members (or by all members if management is to be by all collectively).

Once adopted and signed, the articles can be filed. Once filed, the LLC exists on paper only (de facto). Until membership certificates are actually issued, it does not exist at law (de jure). Outstanding membership certificates in the hands of members is the defining characteristic behind the existence of an LLC.

After filing the articles, the next step is for the potential members of the LLC to meet and purchase their membership certificates and the adoption of the operating agreement for the business. The adoption of the operating agreement could have occurred at the first meeting. The membership certificates, however, should be issued only after the articles are filed when it has become a de facto LLC. Until the business actually exists (has its articles filed), it does not have the legal right to sell its membership certificates. If a business's articles are denied at filing, the business must return any money that it received from the premature sale of membership certificates. If the money cannot be returned, the person who received the money for the business can face serious criminal charges. Again, no money should be taken for membership certificates until after the articles are filed.

The members must adopt an operating agreement which governs the day-to-day management of the business and the rights and obligations of the members. It is similar to the by-laws of a corporation or the partnership agreement of a general or limited partnership. The law regarding operating agreements is specifically discussed in the Operating Agreements chapter.

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CHAPTER 4

TAX CONSIDERATIONS

This chapter is intended to help explain the tax consequences that will be faced in creating a limited liability company. These consequences are, in themselves, neither good nor bad, they merely exist. This chapter is definitely not intended to replace a tax professional. An entire book can be written on limited liability tax law. Given these limitations, this chapter gives the reader a basic overview of the most important aspects of the limited liability company tax law. THE IMPORTANT POINT TO BEAR IN MIND IS THAT A LLC WILL BE TREATED FOR FEDERAL TAX PURPOSES AS EITHER A CORPORATION OR A PARTNERSHIP DEPENDING ON THE OPERATING SELECTIONS MADE BY THE MEMBERS IN THE OPERATING AGREEMENT.

Armed with this knowledge, a member will be better able to effectively participate in planning the LLC's operations. The recommendation that a limited liability company consult a tax professional is both rational and reasonable. Limited Liability Company tax law, when treated as a partnership, is, in many instances, the same as individual and partnership tax law. There are, however, areas of particular concern for which members should be aware. It is towards those areas, that this chapter is addressed.

I. TAX TREATMENT AS EITHER A CORPORATION OR A PARTNERSHIP

A. INTRODUCTION

The main reason that people form an LLC is to avoid personal liability for the debts the business may incur. In a general partnership or joint venture, all of the partners and joint venturers are jointly and severally liable for the debts if the partnership. Each of the partners is totally liable and responsible for paying all the debts of the partnership or joint venture even though the partner may own only a fraction of the entity.

By contrast, in a corporation, shareholders are not responsible for the payment of a corporation's debts. Limited partners are not responsible for the payment of the limited partnership's debts. The major differences between a corporation and a limited partnership are:

  1. Shareholders are not liable for corporate debt whereas general partners (managers) of the limited partnership are personally liable for the payment of the limited partnership debts, and
  2. Limited partners may not participate in the management and administration of the daily affairs of the limited partnership without losing their protection from liability for limited partnership debts. On the other hand, shareholders can be employees, officers or directors of their corporation without incurring personal liability for corporate debt.

A third difference between partnerships, both general and limited, and a corporation is how they are taxed. Partnerships are not taxed on their income. Partnership income is divided among partners according to their ownership interest in the partnership. Partnership income is allocated to each partner, and each partner reports this income on his personal income tax return. The tax arrangement is different for a regular corporation (called a C corporation). A tax is placed on all of the C corporation's net income. Distributions which are made to the shareholders are treated as dividends and are included on the shareholder's tax return. The income of a C corporation is taxed twice: once at corporate level and again when distributed to the shareholders.

The double taxation of the income of a C corporation is imposing on small businesses. A small business that operates as a C corporation has its income taxed twice, resulting in shareholders receiving reduced amounts of net income. The corporation does, however, protect shareholders from liability. On the other hand, if the business is a general partnership, income is passed to the partners where it is taxed only once, as personal income. There is no limited liability for the general partners for business debts.

In contrast, if the business is operated as a limited partnership, partnership income to partners is still taxed only once, and limited partners have limited liability for business debts. They are, however, precluded from working in the business.

To help small business, Congress enacted a special provision (subchapter S) in the tax code, creating a subchapter S corporation or simply, an S corporation. Congress permits a small corporation having only one class of stock and having 35 or less shareholders who are Americans or legal residents (corporations, partnerships and non-resident aliens can not be shareholders) to elect to become an S corporation. The S corporation is treated for tax purposes as a partnership. The S corporation has the protection of a corporate form plus the right of the shareholders to participate in the business and have its income taxed as a partnership.

The favorable tax treatment of an S corporation when combined with the right of the shareholders to participate in the business's management without losing their protection for corporate liability are cogent reasons for choosing an S corporation entity over a partnership or a C corporation.

B. LIMITED LIABILITY TAX TREATMENT

A LLC is a cross between a corporation and a partnership because it has operative elements of both. An LLC offers protection from liability of the business's debts to all of its members like a corporation does for it shareholders. The management and operations of the LLC are governed by the terms of the operating agreement, which is similar to a partnership agreement. Because of this cross nature, not all states recognize LLC's. In fact, January 1994 data reflects that only 46 entities permit businesses to operate as an LLC.

For federal tax purposes, an LLC poses unique concerns. Because it has elements of both a C corporation and a partnership, the IRS has struggled over how to tax it: partnership or corporation. If the LLC is taxed as a partnership, its income is passed to its members and double taxation is avoided. On the other hand, if the LLC is taxed as a corporation, its income is taxed twice: first when earned and second when received by members. Clearly, it is better for an LLC to be taxed as a partnership.

Whether taxed as a corporation or a partnership, the members of a limited liability company will still be protected from liability for the company's debts.

C. THE INTERNAL REVENUE SERVICE'S DETERMINATION TEST

A LLC offers some distinct advantages over an S corporation. Like an S corporation, an LLC may, under appropriate circumstances, be treated as a partnership for tax purposes. In addition, an LLC, unlike an S corporation, may have:

  1. More than 35 members.
  2. Members who are non-resident aliens, corporations, partnerships and all types of trusts, and
  3. More than one class of membership.

The above advantages that are available to LLC's are some of the reasons for the growing demand for LLC's in the United States and abroad (even Mexico recognizes them as well as ordinary corporations).

To determine whether an LLC will be taxed as a corporation or a partnership, the IRS has developed a four-prong test. If an LLC possesses any three of the four following corporate characteristics, it will be taxed as a corporation and not as a partnership:

  1. Limited Liability For Its Members. All LLC's will have this characteristic. It is to obtain limited liability for the members that the members elected to conduct business as an LLC.
  2. Centralized Management. The states which permit LLC's allow the members to vest the management of the business in certain managing members. When this is done, the management of an LLC assumes the corporate characteristic of a board of directors.
  3. Free Transferability of Interests. The right to sell, transfer or convey an interest in a business freely and without restrictions is a corporate characteristic. Such a right is similar to a person being able to sell his stock in a company. The operating agreement for an LLC is permitted to contain restrictions on a member's right to sell, assign or convey his interest in the business. If an operating agreement imposes restrictions on the sale or transfer of a member's interest, the interest is not freely transferable and the business has not assumed this characteristic of a corporate existence.
  4. Continuity of Life. The most important aspect of a corporation is its continuance after the death or withdrawal of one of its shareholders. A corporation, unlike a partnership, does not terminate upon the death of its shareholders. If an LLC is required under the terms of the operating agreement to remain in full effect until its termination date, even after the death of a member, it will be considered to have the continuity-of- life characteristic of a corporation. If the remaining members must vote to continue the company life, this corporate characteristic does not exist.

In determining whether an LLC is treated as a corporation or partnership for tax purposes, the United States Tax Court in Larson vs. Commissioner 66 T.C. 159, required the IRS to give equal weight to each of the above characteristics. The IRS acquiesced (agreed to comply with the Tax Court's directive). This is the test to be applied to determine if an LLC will be treated as a partnership or as a corporation for tax purposes.

Under the regulation promulgated by the IRS, if the operating agreement states that the business will dissolve upon the death, insanity, bankruptcy, retirement, resignation or expulsion of a member, the continuity-of-life characteristic will not exist. If the operating agreement provides for the continuation of the business after the occurrence of any of the foregoing events, the continuity-of-life characteristic will be met. Where all of the members must consent to the continuation of the business upon the happening of any of the foregoing events, the continuity-of-life characteristic is not met because of the uncertainty of remaining members approving the continuation.

The IRS regulations state there is no centralized management of an LLC unless the managing members are vested with sole authority to make decisions. When the managing members are elected by the members, the corporate characteristic of centralized management exists. The corporate characteristic of limited liability exists if, under state law, the members are not liable for the debts of the company. Twenty-four states recognize that members of LLC's are not liable for the company debts. A limited liability company formed in these states will have the corporate characteristic of limited liability for its members.

The corporate characteristic of free transferability of interest is the characteristic most likely to cause concern. The IRS regulation holds the test is whether or not a member can substitute another person into the company for himself without the consent of the other members. For free transferability to exist the person acquiring the interest in the business must be able to assume all of the rights, powers and duties of a member. The characteristic of free transferability will not exist if a member is limited to assigning only the right to participate in the business' profits but cannot automatically participate in the business' management.

In a series of Revenue Rulings to determine whether an LLC should be treated as a corporation or as a partnership for tax purposes, the IRS has applied the following tests:

  1. Revenue Ruling 93-5 (December 28, 1992). The IRS treated a Virginia LLC as a partnership. The company had only the corporate characteristics of a limited liability and centralized management. The company did not have continuity of existence because consent of all remaining members was needed to continue after the withdrawal of a member. The company did not have free transferability of its interests because an assignee (person who acquires an interest from a member) does not have the right to participate in the business' management without the consent of all members.
  2. Revenue Ruling 93-30 (April 1993). The IRS treated a Nevada LLC as a partnership. The company had only the corporate characteristics of a limited liability and centralized management because the operating agreement permitted the members to elect managing members. The company did not have continuity of existence because consent of all remaining members was needed to continue after the withdrawal of a member. The company did not have free transferability of its interests because an assignee (person who acquires an interest from a member) did not have the right to participate in the business' management without the consent of all members.
  3. Revenue Ruling 93-38. The IRS treated a Delaware LLC as a corporation. The company had the corporate characteristics of a limited liability, centralized management, free transfer-ability and continuity of life. The operating agreement permitted the company to be managed by elected members. The operating agreement also permitted the company to continue its existence after the death of a member without a vote of the members. Therefore, it had the characteristic of continuity of life. In addition, the company permitted a member to sell his interest and the purchaser to participate in the business management without the consent of the other members. Thus it satisfied the requirements for free transferability. Since it takes only three of the four characteristics for the company to be treated as corporation and this company has all four characteristics, it was treated as a corporation for tax purposes.
  4. Revenue Ruling 93-53 (August 1993). The IRS treated a Florida LLC as a partnership. The company had only the corporate characteristics of limited liability and centralized management because the operating agreement permitted the members to elect managing members. The company did not have continuity of existence because consent of all remaining members was needed to continue after the withdrawal of a member. The company did not have free transferability of its interests because an assignee (person who acquires interest from a member) did not have the right to participate in the business' management without the consent of all members. Important Note: Even though Florida recognizes LLC's, they are taxed under it state law as corporations and not as partnerships.

IMPORTANT NOTE: EVEN THOUGH SOME STATES PERMIT A LIMITED LIABILITY COMPANY TO HAVE ONLY ONE MEMBER, THE INTERNAL REVENUE SERVICE HAS STATED THAT IN REV. PROC. 95-10, THAT IN ORDER FOR A LIMITED LIABILITY COMPANY TO BE TREATED AS A PARTNERSHIP FOR TAX PURPOSES IT MUST HAVE AT LEAST TWO MEMBERS. AS A RESULT OF THE IRS'S REV. PROC. 95010, IF A SOLE INDIVIDUAL WISHES TO FORM A SOLELY-OWNED BUSINESS ENTITY AND HAVE IT TREATED AS A PARTNERSHIP, THE INDIVIDUAL SHOULD CONSIDER FORMING A SUBCHAPTER S CORPORATION BECAUSE ANY LIMITED LIABILITY COMPANY THAT A LONE INDIVIDUAL FORMS WOULD BE TREATED TAXWISE AS IF IT WERE A CORPORATION. IF, HOWEVER, SUCH A LIMITED LIABILITY COMPANY SUBSEQUENTLY WERE TO ADD ANOTHER MEMBER THEN UNDER REV. PROC. 95-10, IT COULD QUALIFY FOR PARTNERSHIP TAX TREATMENT PROVIDED THE OTHER REQUIRED ELEMENTS WERE MET. REV. PROC 95-10 SHOULD BE REVIEWED BEFORE FORMING A LIMITED LIABILITY COMPANY TO ASSURE THAT THE COMPANY MEETS THE TESTS FOR PARTNERSHIP OR CORPORATION TAXATION AS SET FORTH ABOVE.

Generally, it just does not make good sense to do business as an LLC unless the company will be treated as a partnership for tax purposes. If the company is going to be taxed as though it were a corporation, it should be a corporation in fact. As a corporation, a subchapter S election can be made to have the corporation treated as a partnership anyway. The items that must be relinquished to ensure an LLC is not a corporation for tax purposes are important; the members must agree that:

  1. The purchaser or assignee of a membership interest cannot participate in the company business without the consent of all the members, or
  2. The company will terminate on the death of resignation of a member, or
  3. The company will be managed by elected members.

These requirements all have an impact on the value of the company. A corporation that will terminate on the death or resignation of a member has very little cash value beyond its assets. Moreover, if a purchaser cannot participate in the company's management, there will be no way that the assignee can protect his interest. The market for the membership interest in an LLC that is treated as a corporation for tax purposes is severely limited.

The operating agreement in this book contains provisions for the members to elect to have the company treated as either a corporation or a partnership. Unless the company will be treated for tax purposes as a partnership, an LLC should not be created. A subchapter S corporation should be created instead.

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CHAPTER 5

LIMITED LIABILITY OF MEMBERS

I. INTRODUCTION

It is the hallmark of an LLC that neither its members nor its managers are personally liable for the debts of the company. In this respect, a LLC is similar to that of a corporation. A limited partnership bestows limited liability on the limited partners, but the general partners remain personally liable for payments of all the partnership debts. It is the limited liability of its members that is the most important elements of an LLC. Each of the 48 entities that permit LLC's have laws that specifically state that the members of LLC's are not liable for the payment of the company's debts, liabilities or obligations except under certain circumstances. The American Bar Association's (ABA) Working Group on the Prototype Limited liability Company Act of November 1992 proposed in section 305 the following uniform provision:

"A member of a limited liability company is not a proper party to a proceeding by or against a limited liability company solely by reason of being a member of the limited liability company, except where the object of the proceeding is to enforce a member's right against or liability to the limited liability company or as otherwise provided in the operating agreement."

This provision is very similar to that contained in the laws of those states that permit LLC's. The ABA hopes to create a Uniform Limited Liability Company Act that will be adopted by all of the states.

This chapter explains the unique facts and circumstances under which members of an LLC can be found liable for the debts of the company. Such situations are few, but they can arise often enough that the specter of loss of limited liability protection is a real concern for the company.

II. LIABILITY IMPOSED BY LAW

As stated above, the general rule is that members of an LLC are not liable for the debts, liabilities and obligations of the company; hence the name LLC. As with any rule, there are exceptions. First, the law simply means that no member or manager will be liable for the company's debts just because they happen to be members or managers of the company. The non-liability of members is the main difference between an LLC and a general partnership (in which all of the partners are liable for the debts of the partnership). While members are not liable for the debts of the LLC because of their membership status, they may be liable for the company's debts based on other unrelated grounds.

A person cannot avoid liability for his personal acts regardless of the type of business in which he is engaged. Just as a shareholder is personally responsible for his own torts (civil wrongs), so is a member of an LLC. Example: If a member if an LLC illegally dumps hazardous wastes belonging to the company, he will be personally liable for the damages as well as the company being liable. The liability of the member is not because he is a member of the company but because he directly committed the tort. If a member could not be liable for torts committed for the benefit of the company, then all types of criminal or tortious conduct would be committed by individuals under the umbrella of their companies.

In the operating agreement or in the articles the members can agree that a member will be liable to the LLC or its individual members for damages derived from gross negligence or willful misconduct of the member. In fact, this is a common provision in most operating agreements because it requires all of the members to use ordinary business acumen and care in running the business. All members of a company are presumed by law to be bound by a fiduciary duty toward the other members. This same fiduciary duty exists between partners of a partnership and the officers of a corporation. A person who breaches such a fiduciary duty is normally liable to fellow members for all of the damages caused by the breach. The member may be sued by fellow members for damages caused to the company as a result of the breach. The member is liable for the debts or liabilities suffered by the company as a result of his gross negligence or willful misconduct.

Another instance in which liability may be imposed on a member is if the member agrees in the operating agreement or subsequent written agreement to make a future contribution, that is an asset of the company. If that contribution is not made and a creditor of the company obtains a judgement against it, the creditor may execute against the member for the value of the promised contribution. For example, assume that George had agreed to contribute $100,000 in the future as payment for his interest in the company. He had not paid the money by the time Ed obtained a judgment for $200,000 against the company. Ed can sue George for the $100,000 he agreed to contribute to the company.

In addition, a member will be liable for any company debt or obligation he personally guarantees. The liability for guaranteed debts is the same as that of shareholders who give personal guarantees for a corporation's debts. This is straight forward. If a lender loans a company money or grants it credit based on a member guaranteeing payment, the lender can sue the member for such payment if the company defaults on its performance.

The above are unique situations in which a member will be held liable for the debts or obligations of an LLC. They illustrate that liability for such debts occurs because a member breached a fiduciary duty or specifically agreed to be bound for the debts by a guarantee or promise to make future contributions.

III. LIABILITY UNDER THE ALTER-EGO THEORY

LLC's are rather new. As a result, much of the case law as to how courts will treat them is developing. A potential guide for this developing law is how the courts treat corporations. An aspect of corporate law that will be applicable to LLC's is the alter-ego theory (also called "piercing the corporate veil"). This theory is used to find shareholders personally liable for the debts of the corporation. Since LLC's share some of the characteristics of corporations, this theory should be of concern to LLC members.

Under the alter-ego theory, if shareholders disregard the corporate form and act as though the business were a partnership, it will be treated as a partnership. This is not for tax purposes but for personal liability for the company's debts. The courts look to substance over form. If a business acts as a partnership, it may well be treated as a partnership even if it was validly formed as an LLC. If a business is treated as a partnership, its members are personally liable for the debts of the company.

A court looks at several aspects to determine if the alter-ego theory applies. It determines if a corporations by-laws were ignored along with any pertinent state laws. In like manner, a court will probably investigate an LLC's comparable instrument, its operating agreement, to find violations of its provisions as well as violations of state laws. Many states also require corporations to maintain a minimum capitalization in order to conduct business. A court may look to the LLC for adequate capitalization, even though there is no statutory requirement.

As in corporate law, if members misrepresent the status of the LLC, such as saying it is a corporation or a partnership when it is a limited liability company, the courts will probably find it to be a partnership based upon those misrepresentations. In a practical sense, courts probably will be reluctant to declare an LLC the alter-ego of a partnership and LLC's are not required to maintain a minimum amount of capitalization. Consequently, they cannot be declared partnerships for failing to maintain a certain amount of capital.

Unless the members have actually disregarded the terms of the operating agreement or deliberately misled third parties as to the company's true form, it is unlikely that a court will declare the LLC to be a partnership.

IV. LIABILITY IN STATES NOT HAVING LLC LAWS

As of January 1996, only 48 entities permit LLC's to be formed in their boundaries. A minority of only two states (Hawaii and Vermont) do not permit their citizens to do business using LLC's. Not since the civil war has there been such a clear delineation of states along a single line. A conflict of law is imminent concerning treatment of an LLC wishing to or doing business in a state that does not recognize LLC's. The law, as yet, is unsettled as to whether a non-LLC company state will be forced to permit a LLC from another state the right to do business in the state with limited liability protection for its members.

Deep questions as to state sovereignty and public policy arise in discussing this issue. It would seriously erode a state's traditional power to provide for the health, safety and welfare of its citizens if it were forced to accept an LLC from another state while denying its own citizens the right to do business the same way. A business properly formed in one state should be permitted under the Full Faith and Credit Clauses of the United States Constitution to conduct business in any state. Forcing a state to grant full faith and credit to the LLC is to permit a foreign company to conduct business in the state in a manner that is not allowed the citizens of that state. This brings about the corollary: citizens of the state would be denied equal protection of the law because they are not permitted to conduct business as LLC's. The clear consequence is that the state will have to permit its own citizens to form LLC's even if it does not believe this is best for its citizens. This occurrence means that public policy for the state is being set, not by the state, but by the other states.

All of the states permitting LLC's have provisions that permit their LLC's to do business in other states. These states hope that through these provisions the states which do not have LLC's will be compelled to grant full faith and credit status to their companies.

Before an LLC does business in a state which does not permit LLC's, the members should consult a corporate and a tax attorney in that state. Before conducting business in a non-LLC state, the LLC must know how that state will treat the company. Many of the non-LLC states will permit foreign LLC's to do business in their state and will honor the terms of the operating agreement, including its limited liability provisions. While that may be the case in some states, it should not be assumed to be the case in all. Until the United States Supreme Court rules on the issue of whether a non-LLC state must recognize foreign LLC's, the matter will be decided by each individual state in its courts in small, difficult cases.

As it now stands, each of the non-LLC states can decide for themselves whether they will permit foreign LLC's to conduct business. If a state elects to prohibit foreign LLC's, an LLC doing business in the state will probably be treated as a partnership, and members of the company will be treated as partners and be personally liable for the debts and liabilities of the LLC incurred in the state.

Until the matter is decided by the United States Supreme Court, one should conclude that the members of an LLC will not have limited liability for debts incurred in any state that does not recognize LLC's. When business is conducted in any of the four states that do not permit the formation of LLC's, the members of the LLC must weigh the consequences of their acts. If chances of a lawsuit from the out-of-state business are slight, no harm is derived from doing the business. It is the function of any business to weigh the risks of any decision and to compare them to the potential benefits.

Most LLC's will do business solely within their own states or in states which permit LLC's so problems concerning limited liability of their members should not arise. It is only when the LLC seeks to do business in non-LLC states that the real potential for liability arises for the members. Before conducting business in a non-LLC state, legal advice should be obtained concerning state recognition of liability protection for the members. The advice should be in writing; the person who gave it can be sued for malpractice if it is wrong.


CHAPTER 6

CAPITAL CONTRIBUTIONS AND DISTRIBUTIONS

I. INTRODUCTION

This chapter discusses the financial arrangement of an LLC: the capital contributions of the members and how they affect members' rights in the company. The states that permit LLC's to be formed have adopted specific statutes concerning contributions of the members and their effects. This chapter explains how LLC states treat a member's contributions and distributions.

II. CAPITAL CONTRIBUTIONS

A. A MEMBER'S SHARE IN PROFITS AND LOSSES

The members of an LLC can agree to split the profits and losses in any manner they wish. In the absence of a specific method defined in either the articles of organization or the operating agreement, state law will determine how they will be allocated. Most states will base a member's ownership in an LLC on the member's percentage of contributions to the firm rather than the per capita basis used for a partnership.

In the following states, for example, book value or a member's contributions to the LLC is used to determine percentage of the member's interest absent an agreement to the contrary:

Florida Illinois Iowa Maryland

Minnesota Nevada Oklahoma Rhode Island

Texas Utah Virginia W. Virginia

Wyoming

The only contribution considered in determining a member's interest is the value of the capital contribution actually given to the company. For example, assume that a member guarantees a loan for the company. The loan does not increase the book value of the company, but for purposes of per capita valuing the loan would be included. For example, assume that the members contribute services to the company. The services will not increase the book value of the company.

In some states, such as the following, a member's voting interest is based upon per capita interest of the member in the company absent an agreement to the contrary:

Arizona Colorado Kansas Louisiana Delaware

Per capita interest means equal splitting of the profits and losses among the members. The per capita formula is most often used where the members are personally liable for the debts of the business such as a partnership. The personal liability of the members gives them a greater interest in the company than just capital contributions. Since members in an LLC have limited liability, the rational for using per capita sharing is not present.

In most small businesses the members participate equally in business operations. Since the members have no personal liability, there is little reason to maintain the records necessary for per capita sharing. The majority rule for sharing requires only a record of capital contributions. Per capita, however, requires a record of every form of contribution. Loan guarantees and service contributions have to be constantly updated and calculated. The per capita rule is basically the rule used for a partnership stating that all profits and losses of a partnership are split equally among the partners unless a partnership agreement is written otherwise.

Use of the per capita rule would be an unnecessary burden for most LLC's. Consequently, the operating agreement in this book is written for capital contributions (the majority rule rather than the per capita rule).

B. AMOUNT OF CONTRIBUTIONS

Unlike the statutes for corporations, states do not require an LLC to have or maintain a minimum amount of capital to be formed or to continue to exist. The traditional reason for requiring a minimum amount of capital was to provide security for creditors of the business. In the modern business world, creditors do not base their dealings with a business on any minimum capitalization. Instead, creditors base their loan or credit with businesses on credit reports. Recognizing this, states that permit LLC's do not require them to maintain minimum capitalization.

Since state law does not require any specific amount of contributions, it therefore falls on the members to agree on amounts and forms of contributions. The amount of each member's contribution must consider the total needs of the company to conduct business. The agreement regarding capital contributions must be included in the operating agreement. State laws also permit members to agree to make future capital contributions if requested. Any agreement that binds members to future contributions must be in writing to be enforceable.

Generally, it is not a good idea to have a provision in the operating agreement that permits calls upon members for additional capital. If a company needs more money, members may voluntarily contribute funds. Members making additional contributions have their capital accounts increased. Thus their ownership interest and share of profits in the company will increase.

C. FORM OF CONTRIBUTIONS

Most states permit members to make contributions to an LLC in any form that has value to the company. Contributions in the form of cash, property, service, guarantees or promissory notes are acceptable. Loans from a member to a company are not treated as a capital contribution because the money must be paid back. If, however, the member forgives the loan to the company, the value of the loan will be treated as a capital contribution.

A few states (most notably Arizona, Colorado, Delaware, Florida and Wyoming) forbid contributions of services for an interest in the company. Generally, it is not wise to count services as a contribution to capital. In a small company all members contribute services, and it would be derisive to value one member's services over that of the others. To do so risks disharmony among the members.

It is wiser to base members' interests on cash and property actually contributed. In the long run, it will prove the better way. It is the combined contributed services and capital that makes the company work. As such, if the actual division is too unfair, the business will not continue. The members can always agree in writing to adjust the division of profits and losses to reflect the intentions of the members.

**** end of sample view of chapter ****


CHAPTER 7

DOING BUSINESS IN OTHER STATES

I. INTRODUCTION

As an important consideration for an LLC that will be doing business in states other than where formed is how the company will be treated in these foreign states. Only 48 states and the District of Columbia permit LLC's to be formed (Hawaii and Vermont are the sole-holdouts as of January 1996). This split between states that permit LLC's and those that do not creates uncertainty for LLC's doing business across state lines.

This chapter mentions problems and offers resolutions available for LLC's doing business across state lines. Major concerns are how the LLC will be taxed and if members will be accorded limited liability for company debts incurred in an alien state. Because LLC's are new, it is unclear how non-LLC states will treat LLC's doing business in their boundary. Nevertheless, by drawing comparisons with corporations and limited partnerships, one can determine how LLC's will be treated.

II. FOREIGN LLC ENTITIES

A. IN STATES WHICH RECOGNIZE LLC

The states which permit LLC's to be formed also recognize LLC's from other states (these are generally called foreign LLC's). To conduct business in a state which permits LLC's, a foreign LLC merely registers with the secretary of state just as a foreign corporation or limited partnership must do. Once the foreign LLC has filed the appropriate documents to conduct business in the state (usually no more than an application), it is permitted to engage in business on the same footing as an LLC formed under that state's LLC law.

A foreign LLC remains governed by its operating agreement in another state as long as those provisions do not violate the other state's law. The statutes of most states permitting LLC's have provisions that specifically detail that the state law of the foreign LLC controls on such issues as members' voting rights, capital contributions, members' liability and distribution. On the other hand, no state will permit a foreign LLC to conduct a business which is barred to LLC's formed under its own state law. Example: A provision of Virginia's Limited Liability Company Act states that a foreign LLC shall :

"have no greater rights and privileges than a domestic limited liability company to exercise any of its powers of purposes than a domestic limited liability company. The registration shall not be deemed to authorize the foreign limited liability company to exercise any of its powers or purposes that a domestic limited liability company is forbidden by law to exercise in this Commonwealth."

The Virginia statute makes clear that once a foreign LLC registers in the state it will be treated the same as a Virginia LLC. The operative word is registered. A foreign LLC will obtain similar treatment to a domestic company after it registers with the secretary of state of that state. Registration as a foreign LLC usually means filing an application which discloses:

  1. The name of the LLC.
  2. The state of formation.
  3. The address of the registered office in that state.
  4. The names and addresses of the managing members.
  5. Other information a state may require.

Upon its submission, the secretary of state will review the application for compliance. If the application satisfies state law, the secretary of state will issue a certificate of qualification. After the certificate of qualification is issued, a foreign LLC can legally conduct business in the state. If a certificate of compliance is not issued, a foreign LLC cannot legally do business in the state. A foreign LLC that does not register with the secretary of state is taking a great risk. Without a certificate of compliance, the company is not allowed to file and maintain a lawsuit in court. Moreover, if a foreign LLC does not register with the secretary of state but continues to do business in the state, its members may lose limited liability protection. For example, assume that a foreign LLC from state A fails to register in state B. Its members may become personally liable for debts incurred by the company in state B. In addition, a company which does not register with the secretary of state will be liable for both fines and penalties.

B. IN STATES THAT DO NOT RECOGNIZE LLC

A minority of only two states remain which do not recognize LLC's. This poses a unique Constitutional question. "How is a foreign LLC treated when it does business in a state that does not recognize LLC's? Because they are new, it is unclear how they will be treated when doing business in states that do not permit LLC's. The state, Hawaii or Vermont, has two options. It could:

  1. Give full faith and credit to the terms of the operating agreement and grant limited liability to the members for business operations in the state , or
  2. It can disregard the LLC form and treat the company as a partnership with each member being personally liable for the debts of the company incurred in that state.

Arguments concerning how the state should proceed are equally split. Granting full faith and credit to the LLC is to permit a foreign company to conduct business in the state in a form that is not permitted the citizens of that state. Therefore, the citizens of the state are denied the equal protection of the law because they are not permitted to conduct business as LLC's. The counter argument is that a business properly formed in one state should be permitted under the United States Constitution to conduct business in any state.

All of the states which permit LLC's have provisions that permit their LLC's to do business in other states. These states believe that these provisions will move the states that do not have LLC's to grant full faith and credit status to their companies.

The general consensus is that most probably the U. S. Supreme Court will not require those states not permitting their citizens to form LLC's to recognize foreign LLC's. The rationale would be premised on the belief that no state should be able to force another state to change its law as long as it is applied equally. If a state does not recognize a LLC for its citizens, it would seem reasonable that the Supreme Court would probably not be require it to recognize LLCs for citizens of other states.

The most compelling argument in favor of forcing states that have not adopted LLC statutes to permit foreign LLC's to do business is the contract clause of the U. S. Constitution, whereby no state is permitted to make any laws which impair the obligations of contracts. Thus the argument is members agreeing to conduct business as an LLC form a contract among themselves, and the state should not interfere. The weakness of this argument is that their contractual agreement also affects rights of third parties who had not agreed to be bound. Example: An employee of an LLC becomes involved in an accident in a state that recognizes LLC's. The members will not be liable for the damages. If the LLC is doing business in a state that does not recognize LLC's, the member may be found personally liable for the damages. The argument by the states that do not permit LLC's is that LLC's are not needed because the state already permits corporations and limited partnerships as vehicles for limiting liability for partners, shareholders or investors.

Until there are more decisions, it is wiser and safer to conclude that members of an LLC would probably not have limited liability for debts incurred in any of the five states that do not recognize LLC's. As a practical matter, most small companies do not engage in business across state lines. Those that do find it is not the type of business resulting in large lawsuits. An LLC formed in any of the 48 states or District of Columbia that permit them can freely engage in business in any of them without fear of losing limited liability protection for members. When business is conducted in any of the states that do not permit the formation of LLC's, the members of the LLC must weigh the consequences of their acts. If chances of a lawsuit from the out-of-state business is slight, no harm is derived from doing the business. On the other hand, as potential for a lawsuit increases, risk to members also increases.


CHAPTER 8

BULK SALE

When members transfer assets of a prior business to an LLC in return for stock, the LLC must consider the state's Bulk Sale Law. All states have adopted the Uniform Commercial Code in some fashion. A portion of the Code deals with giving notice to creditors of a bulk transfer of assets of a business.

The purpose of the Bulk Sale Law is to prevent business owners from attempting to defraud or avoid creditors by transferring all or substantially all (i.e. the bulk) of the business assets to another person or entity. The law also inhibits the sale of assets in a bargain or sweetheart sale (below fair market value), a scheme whereby the owner of the business still retains some control. Example: The sale of business assets to another business that the owner also controls.

For most new LLC's involving prior existing businesses there is no intention to defraud creditors. An LLC is usually established to change the form of the business, not to disassociate from the debts of the prior business. Where the LLC assumes both assets and debts of an unincorporated business, compliance with the Bulk Sale Law is merely a formality. The new LLC is responsible for the debts of the old business to the extent of the value of the assets transferred.

The real concern arises where the business transferring all of its assets to the LLC will have debts that the LLC will not assume. In this situation, the LLC should consult an attorney to ensure it will not be liable for those debts. The Bulk Sale Law of each state was enacted to settle such disputes.

Under the Bulk Sales Act of the Uniform Commercial Code, a LLC can safely issue its membership interests for property transferred to it by a business with outstanding liabilities, which the LLC will not assume, if it does the following:

  1. Prepare a Notice to Creditors of Bulk Transfer. The LLC publishes the notice in a paper of general circulation for the judicial district (usually a county) where the property to be transferred to the LLC is located. The notice must also be published in the judicial district or county where the principal executive office of the prior business is located. The publication must be completed at least 12 business days prior to the date of transfer of the property.
  2. File copies of the Notice of Bulk Transfer with the county recorder and the county tax collector in each judicial district or county where the property is located and where the prior business has its principal office at least 12 business days before the transfer.

Section 6-104 of the Uniform Commercial Code (adopted by all states) reads in part:

(1) Except as provided with respect to auction sales (Section 6-108), a bulk transfer subject to this Article is ineffective against any creditor of the transferor unless:

(a) The transferee requires the transferor to furnish a list of his existing creditors prepared as stated in this section, and

(b) The parties prepare a schedule of the property transferred sufficient to identify it, and

(c) The transferee preserves the list and schedule for six months next following the transfer and permits inspection of either or both and copying therefrom, or files the list and schedule in (a public offic to be here identified).

After the notice is given to the creditors, if the creditors do not object to the transfer, the LLC can take possession and title to the assets free of all creditors claims. If, however, creditors for the prior business present claims against the property, special rules apply. Section 6-106 Uniform Commercial Code reads as follows:

"In addition to the requirements of the two preceding sections:

(1) Upon every bulk transfer subject to this Article for which new consideration becomes payable except those made by sale at auction it is the duty of the transferee to assure that such consideration is applied so far as necessary to pay those debts of the transferor (Section 6-104) or filed in writing in the place states in the notice (Section 6-107) within 30 days after the mailing of such notice. This duty of the transferee runs to all the holders of such debts, and may be enforced by any of them for the benefit of all.

(2) If any of such debts are in dispute the necessary sum may be withheld from distribution until the dispute has been settled or adjudicated;

(OPTIONAL PROVISIONS FOR THE STATES)

(3) If the consideration payable is not enough to pay all of the said debts in full distribution shall be made pro rata.

(4) The transferee may within 10 days after he takes possessions of the goods pay the consideration into the (specify court) in the county where the transferor has its principal place of business in the state and thereafter may discharge his duty under this section by giving notice by registered or certified mail to all the persons to whom the duty runs that the consideration has been paid into that court and they should file their claim there. On motion of any interested party, the court may order the distribution of the consideration to the persons entitled to it."

Basically, if the LLC wants to exchange an equity interest for property of a another business and creditors of that business are asserting their rights, the LLC has two choices. It can pay off the creditors of that business. This amounts to paying twice for the property. Secondly, the LLC can deposit the membership interest with the court and let the court decide who owns them. The court may decide to present the LLC with some entirely unexpected members with whom the other members cannot operate. Neither of these eventualities are especially appealing. The third unspoken alternative is probably the one most often followed, forgetting the entire transaction. For this reason, in the event of a bulk transfer dispute, the LLC should, for its own protection, seek legal advice before proceeding with the transaction.

A typical form for a "Notice to Creditors" follows.


RECORDING REQUESTED BY

WHEN RECORDED MAIL TO

______________________________________________________________________________________ Space above the line is for Recorder's use

NOTICE TO CREDITORS OF BULK TRANSFER

NOTICE is hereby given to the CREDITORS of _______________________________________Transferor (s), whose business address is ________________________________________________________,County of ________________________, State of ____________________________ .

The property is described as general: ALL STOCK IN TRADE, FIXTURES EQUIPMENT AND GOOD WILL OF THAT:

______________________________________________________________________________ TYPE OF BUSINESS

BUSINESS KNOWN AS ________________________________________________ NAME OF BUSINESSand located at ___________________________________________ ___________________________________,County of ________________ State of __________ .

The Bulk Transfer will be consummated on or after the ______day of ______ , 199__ at ________ _____________________________


CHAPTER 9

SECURITY LAWS AND COMPLIANCE

I. INTRODUCTION

Membership certificates in an LLC are considered securities under both state and federal law. An LLC's sale of its membership certificates requires the membership certificate be registered and a permit (license) for the sale be obtained unless the membership certificate is exempt from registration. The costs for registering a security under federal law are $100,000 or more and it takes a year or longer to complete.

Both state and federal security laws provide exemption from registration for certain kinds of membership certificates. These exemptions are available only to small businesses that have not attempted to sell their securities through a public offering (public advertisement or solicitation). Exemptions for both state and federal security laws apply when the LLC is a new business being formed or an existing business (whether sole proprietorship or partnership) is being changing into an LLC. The company's members are the prior owners and possibly some of those who have worked closely with the prior business. In such a situation, there is no need for a public solicitation or advertisement. Therefore, exemptions from registration under both state and federal security laws will apply.

This book is not intended to be used by anyone desiring to raise money for an LLC through a public offering. Anyone intending to do so must consult with an attorney. There probably is not an exemption from registration under state or federal law.

Even if an LLC is exempt from the registration requirement for the sale of its securities, the LLC will still be governed by the anti-fraud provisions of the Securities and Exchange Act.

II. EXEMPTION UNDER FEDERAL LAW

The Securities and Exchange Act of 1933 specifies that the sale in the United States of any security (including membership certificates of an LLC) must be registered with the Securities and Exchange Commission unless the security is exempt. The Securities and Exchange Act (the Act) lists several exemptions that are available for small businesses and small private offerings.

A. INTRASTATE EXEMPTION

Section 3(a)(11) of the Securities and Exchange Act offers an intrastate exemption from registration for any offer or sale of securities to residents of a single state who reside in the same state where the LLC was formed and does business. The Securities and Exchange Commission interprets the intrastate exemption to have four requirements:

(1) The LLC must be doing business in the state in which it was formed. This is defined to mean the LLC must have substantial operational activities in the state.

(2) All the offers and sales of membership certificates must be to residents of the LLC's state of organization.

(3) The membership certificate may not be resold by the member to out-of-state purchasers until at least nine months after the last sale of the LLC.

(4) No public solicitation or advertisement is permitted under this exemption.

This is the most commonly used exemption from federal registration. Usually an LLC is established to change the legal form of operation for an existing business or to begin a new business with family members or close friends. Normally, all of the members will reside in the same state and qualify for the intrastate exemption. If not, the exemption is not available for the LLC; however, other exemptions from registration for the sale of the membership certificates may still be available.

B. EXEMPTION UNDER REGULATION D

Section 3(b) of the Securities and Exchange Act grants the SEC (Securities and Exchange Commission) authority to adopt special exemptions for the issuance of securities to a maximum of $5,000,000. The SEC adopted Rules 504 and 505 of Regulation D. Section 4(2) grants the SEC authority to issue special exceptions for "transactions by an issuer not including any public offering," and the SEC defines this type of exemption under Rule 506.

Rule 504 of Regulation D exempts from registration the sale of securities (such as LLC's membership certificates) when:

  1. The LLC is not a reporting (public) company or investment company,
  2. The offering does not exceed $500,000 in a 12-month period, and
  3. There was no public advertisement or solicitation regarding the sale.

Rule 505 of Regulation D exempts the sale of an LLC's membership certificate when:

  1. The LLC is not an investment company,
  2. The offering does not exceed $5,000,000 in a 12-month period,
  3. There will be no more than 35 purchasers excluding accredited investors,
  4. Proper disclosure requirements have been met, and
  5. There was no public advertisement or solicitation regarding the sale.

Rule 506 of Regulation D also exempts certain offerings from registration. An LLC, to be exempt form registration of sale of its membership certificates, must conform to specific requirements:

  1. The offering may be unlimited in quantity. Any amount of money can be raised without losing the exemption.
  2. There must not be more than 35 members, excluding accredited investors who are sophisticated or knowledgeable under SEC regulations and definitions.
  3. For each non-accredited investor, the LLC must reasonably believe that the investor has such knowledge or experience in financial and business matters that he is able to evaluate the merits and risks of the investment, and
  4. There was no public advertisement or solicitation regarding the sale.

This chapter has an example of a Member's Subscription Certificate that should be executed and filed with the LLCs books for each sale of a LLC membership interest. This certificate is sufficient to satisfy the requirement that the investor is sophisticated and accredited. This subscription agreement should be used by every LLC to protect against allegations of fraud. Generally, when a business fails the members try to get their money back. it is not uncommon in such situations for disgruntled investors to claim that they were innocent dupes and tricked into investing in the business. Using a subscription certificate is evidence, though not dispositive, that the member was given all of the available necessary to make an informed decision. Use of the form limits the success of suit for security fraud by upset members.

When substantial amounts of capital are sought to be raised through the sale of LLC membership interests that are exempt under Rules 504, 505 or 506, the LLC should consult an attorney.

Although qualified offerings are exempt under Rules 504, 505 or 506, the LLC must nonetheless file a Form D with the Securities and Exchange if interest are sold to out of state members. It is envisioned that the limited partnership to be formed using this book will use the intrastate exemption instead and not be required to file the Form D.

This book assumes that the LLC will be a small business with less than 35 members (for exemption from federal registration) who will be intimately associated with the day-to-day operations of the company. Consequently, the exemptions will apply. If substantial amounts of capital are to be raised through the sale of membership certificates that are exempt under Rules 504, 505 or 506, the LLC should consult an attorney. Although qualified offerings are exempt under Rules 504, 505 or 506, the LLC must nonetheless file a Form D with the SEC.

This book is written for LLC's where:

(1) The members will participate in the daily management of the business or reserve sufficient review powers in the operating agreement to be able to oversee effectively thE conduct of the managing members.

(2) The LLC is not selling its membership certificate to raise money.

It is envisioned that the LLC to be formed using this book will use the intrastate exemption and not be required to file Form D.

C. EXEMPTION UNDER STATE LAW

As with federal law, nearly all states require that any LLC wishing to sell LLC membership interests in the state either obtain a permit to sell the LLC membership interests or that the LLC membership interests be exempt from registration. Most states have similar limited offering exemptions that permit a LLC to sell a LLC membership interest in the state without having to obtain a permit. Most states also have laws which exempt from registration any security where the LLC has either registered the security with the SEC or has filed Form D for a federal exemption under Rule 504, 505 or 506.

In addition to an exemption based upon a federal filing, all states have limited offering exemptions. LLCs not engaged in a public offering may sell LLC membership interests without a permit. Even though the sale of the LLC interest is exempt, many states require that the LLC file some type of notice with the Secretary of State or security commissioner and pay a small fee. Although notice is for tax purposes, it also serves other informational needs.

Most states do not require a LLC issuing exempt membership interests to file any notification documents. To determine if a notice requirement exists, the person forming the limited partnership can ask the state's department of corporations (or equivalent agency) if there is any state requirement that a form be filed when a newly formed LLC makes a limited exempt offering. If there is a requirement, the agency will supply the necessary form on request. This information can also be obtained from the attorney the LLC is consulting. The laws governing the limited offering exemptions for each state are:

ALABAMA

Section 8-6-11. Sales of the securities are exempt if sold to less than 10 persons within twelve months, no commissions are paid on the sales and no public solicitations or public offerings are employed.

ALASKA

Section 45-55-140. Sales of securities are exempt if sold to less than 10 persons within 12 months, the sales do not exceed $100,000, no commissions are paid on the sales and no public solicitation is employed.

ARKANSAS

Section 23-42-504. Sales of securities are exempt if sold to less than 25 persons within a year, no commissions are paid on the sales and no public solicitation is presented. Proof of the exempt nature of the transaction must be filed with the Secretary of State. The state has also adopted the Uniform Federal-State Limited Offering Exemption 14(b) (14) which basically provides for a state exemption if the issuer received a federal exemption by filing a Form D.

ARIZONA

Section 44-1844. Sales of securities are exempt if sold to less than 10 persons within 24 months, no commissions are paid on the sales and no public solicitations or public offerings are employed.

CALIFORNIA

Corporation Code section 25102(f). Sales to no more than 35 persons are exempt if no commissions are paid on the sales and no public solicitation or public offering is employed. The corporation is required to file a Notice of Transaction with the Corporations Commissioner. The Notice is to be filed within 15 days of the sale. The fee for filing the Notice is usually about $25.00. This book has a copy of the notice form. As can be seen from the form, there is no requirement that the identity of the shareholders be revealed. Failure to file the Notice does not invalidate the exemption.

California has also enacted a new intra-state offering exemption under Section 25102(n). Under this exemption, if the offeror satisfies the same requirements as necessary for a Federal Regulation D exemption, the offeror can sell to an unlimited number of people in California and can engage in limited advertising in a newspaper. The advantage of this offering is that the offeror, if the sales are limited only to California, can advertise in a limited fashion which it can not do in a Federal Regulation D offering if the sales are made in other states. The costs for a Regulation D or 25102(n) offering is around $20,000 when an experienced security law firm is utilized. Most offerings in California rely on the 25102(f) exemption is used because it extremely cheap and fast even though the number of sales is limited to 35 persons.

COLORADO

Section 11-51-308. Sales of securities are exempt if sold to less than 25 persons prior to formation and afterward if the offer of sales is not made to more than 20 persons and the actual sales are made to not more than 10 persons per 12-month period, no commissions are paid on the sales and no public solicitation or public offering is employed.

CONNECTICUT

Section 36-490(B). Sales of securities are exempt if sold to less than 10 persons within 12 months, no commissions are paid on the sales and no public solicitation or public offerings are employed.

DELAWARE

Section 6-7309(b). Sales of securities are exempt if sold to less than 25 persons within the first year and no more than 35 persons in total, no commissions are paid on the sales and no public solicitations or public offerings are employed.

DISTRICT OF COLUMBIA

Section 2-2601(6) lists as exempt transactions as follows:

(E) Any transaction pursuant to an offer directed by the offeror to not more than 25 persons in the District during any 12 consecutive months whether or not the offeror or any of the offerees is then present in the District if the Seller reasonably believes that all of the buyers in the District are purchasing for investment.

(F) Any offer or sale of a preorganization certificate or subscription if:

(i) No commission or other remuneration is paid or given directly or indirectly for soliciting any prospective subscribers;

(ii) The number of subscribers does not exceed 25; and

(iii) No payment is made to the subscriber.

FLORIDA

Section 517.061. Sales of securities are exempt if sold to less than 35 persons within a year, no commissions are paid on the sales and no public solicitations or public offerings are employed. Proof of the exempt nature of the transaction must be filed with the Secretary of State.

GEORGIA

Section 10-5-9. Sales of securities are exempt if sold to less than 35 persons within a year, no commissions are paid on the sales and no public solicitations or public offerings are employed.

HAWAII

Section 485-6. Sales of securities are exempt if sold to less than 25 persons within 12 months, no commissions are paid on the sales and no public solicitations of public offerings are employed.

IDAHO

Section 30-1435. Sales of securities are exempt if sold to less than 10 persons within 12 months, no commissions are paid on the sales and no public solicitations or public offerings are employed.

ILLINOIS

Section 815 ILCS 5/4. Sales of securities are exempt if less than $100,000 is raised or if sold to less than 35 persons within a year, no commissions are paid on the sales and no public solicitations or public offerings are employed.

INDIANA

Section 23-2-1-2. Sales of securities are exempt and no filing is necessary if each purchaser is either an accredited investor or will participate in the management of the business and either (1) there are no more than 15 purchasers in the state or (2) there are no more than 25 shareholders in total and the offering raises less than $500,000.

IOWA

Section 502.203(9). Sales of securities are exempt if sold to less than 35 persons within a year, no commissions are paid on the sales and no public solicitations or public offerings are employed. The exemption does not apply for offerings involving oil, gas or mining.

KANSAS

Section 17-1262. Sales of securities are exempt if sold to less than 15 persons within 12 months, no commissions are paid on the sales and no public solicitations or public offerings are employed.

KENTUCKY

Section 292.410. Sales of securities are exempt if sold to less than 25 persons, no commissions are paid on the sales and no public solicitations or public offerings are employed.

LOUISIANA

Title 51, section 709. Sales of securities are exempt if sold to less than 20 persons within 12 months, no commissions are paid on the sales and no public solicitations or public offerings are employed.

MAINE

Title 32, section 10502. Offers and sales of securities to no more than 10 persons are exempt. Sales from 10 to 25 persons are exempt if the issuer files a Notice of Exemption.


MEMBER'S SUBSCRIPTION CERTIFICATE

FOR

KEPTON MINING COMPANY

This certificate is for use with security offerings exempt from registration under SEC Rules 504, 505 or 506. This certificate must be used for the sale of a limited liability company membership interest.

The statements contained herein are made and given by the undersigned hereinafter referred to as "the Subscriber" to KEPTON MINING COMPANY , a LIMITED LIABILITY COMPANY duly formed and existing under the laws of the State of COLORADO hereinafter referred to as "THE LIMITED LIABILITY COMPANY" as a condition for the purchase of TWENTY PERCENT (20%) membership interest of the limited liability company hereinafter referred to as "the Securities."

I. NAME AND ADDRESS OF THE SUBSCRIBER.

Name: ABNER TIMMONS

Social Security Number: 444-333-2222

Residence Address: 237 Tyler Rock

Denver, Colorado

Business Address:

II. SUBSCRIBER'S REPRESENTATIONS AND UNDERSTANDING.

A. PURCHASE FOR OWN ACCOUNT.

The Subscriber hereby expressly represents, warrants and covenants with the LIMITED LIABILITY COMPANY that the Securities are being purchased in the Subscriber's own name and account or for a trust account in which the Subscriber is trustee, and no other person has any interest or right with respect to the Securities.

B. FOR INVESTMENT PURPOSES ONLY.

The Subscriber expressly states that the Subscriber is acquiring the Securities for investment and not with a view for sale in connection with any distribution of Securities. The Subscriber hereby acknowledges and understands the following:

  1. The Securities have not been registered under the Federal Securities Act of 1933 or qualified under any state law, that any disposition of the Securities is subject to restrictions imposed by federal and state law and that the certificates representing the Securities will bear a restrictive legend.
  2. That the Securities may not be sold, conveyed or transferred without registration and qualification, and that no undertaking has been made with regard to registering or qualifying the securities in the future. The Subscriber understands that no public market exists with respect to the Securities and no representation has been made to me that such a public market will exist at a future date. In addition, it is also understood that the Corporations Commissioner for the State of Colorado

has made no finding or determination relating to the fairness for investment of the Securities offered by the company and that the Commissioner has not and will not recommend or endorse the securities.

3. That it is not contemplated by the LIMITED LIABILITY COMPANY that the Securities will be subsequently registered with the Securities Exchange Act of 1934 to permit public resales of the Securities under the Securities Act Rule 144.

III. NO PUBLIC OFFERING WAS MADE REGARDING THE OFFERING.

The Subscriber expressly states that the Subscriber has not seen nor received any advertisement nor general solicitation with respect to the sale of the Securities ("the Offering").

IV. CONSIDERATION FOR THE SECURITIES.

The total consideration that the Subscriber shall pay for the Securities both in cash and other property shall be:

Consideration Amount: $200,000

Other Property: none

V. SUBSCRIBER'S KNOWLEDGE AND EXPERIENCE.

The Subscriber represents and warrants as follows:

  1. That the Subscriber possesses sufficient knowledge and experience in financial and business matters to evaluate the risk factors involved.
  2. That the Subscriber has evaluated the risk factors and tax considerations involved in any purchase of the Securities.
  3. That the Subscriber has had the following personal or business relationship with the LIMITED LIABILITY COMPANY and its officers, directors and controlling partners:

I HAVE INVESTED IN THE MINING BUSINESS IN THE PAST

I HAVE KNOWN THE GENERAL PARTNERS FOR MANY YEARS

I HAVE REVIEWED THE MINING CLAIMS OWNED BY THE COMPANY

AND I BELIEVE THEM TO BE VALUABLE

The subscriber's business or financial experience is as follows (if none, state None): I HAVE WORKED IN THE MINING INDUSTRY FOR TWENTY EIGHT YEARS

VI. FINANCIAL ADVISORS.

The Subscriber represents and warrants that the Subscriber has consulted with such financial advisors as are listed below and that each is capable of evaluating the merits and risks of the investment, that each such person has had access to the LIMITED LIABILITY COMPANY's records, has had an opportunity to verify the accuracy of all information obtained and is satisfied that sufficient information necessary to make an informed decision has been received. By reason of the business or financial experience of my professional advisor named below, the Subscriber is capable of evaluating the merits and risks of this investment and/or protecting his own interest in connection with this investment.

NAME OF FINANCIAL ADVISOR (IF NONE, STATE NONE): none

FINANCIAL ADVISOR'S OCCUPATION: none

FINANCIAL ADVISOR'S ADDRESS: none

FINANCIAL ADVISOR'S BUSINESS OR FINANCIAL EXPERIENCE:

none NAME OF FINANCIAL ADVISOR (IF NONE , STATE NONE): none

FINANCIAL ADVISOR'S OCCUPATION: none

FINANCIAL ADVISOR'S ADDRESS: none

FINANCIAL ADVISOR'S BUSINESS OR FINANCIAL EXPERIENCE: none

VII. ACKNOWLEDGMENT OF RECEIPT OF INFORMATION.

The Subscriber acknowledges receipt during the course of this transaction and before purchasing the Securities of financial and other written information about the LIMITED LIABILITY COMPANY and the terms and conditions of the offering. The Subscriber received information regarding:

  1. The risks of the offering including the speculative nature of the offering,
  2. The financial hazards involved in the offering,
  3. The lack of liquidity,
  4. The restrictions on the transferability of the securities,
  5. The tax consequences of the investment,
  6. A written description of any written information concerning the offering that had been provided by the company to any "accredited investor" as defined in 17 CFR Section 230.501(a), and
  7. Such other information deemed necessary and desirable to evaluate the LIMITED LIABILITY COMPANY and the Securities offered.

Dated:

Subscriber


CHAPTER 10

ARTICLES OF ORGANIZATION

I. DEFINITION

It is the filing of the articles of organization that forms the LLC. No LLC can exist without filing articles (in Delaware, New Hampshire, New Jersey and Pennsylvania it is called a Certificate of Formation or Organization). The Articles are filed with the Secretary of State for the state in which the LLC is being formed. Out-of-state LLC's (called foreign LLC's) are also required to register with the secretary of state so that their operations can be monitored.

A limited liability company is a cross between a corporation and a partnership. As such, it the following major characteristics of both:

  1. It bestows limited liability on its members,
  2. It can offer the free transferability of its membership interests, and
  3. It can have a continuity of life beyond the resignation, death or withdrawal of a member.

A LLC may give full management and control to just a few managing members: the same treatment that is available in a partnership and similar to that of the board of directors of a corporation.

The main advantage of an LLC is the limited liability it provides its members. As an LLC, the most that its members can lose in a lawsuit against the company are the assets they contributed to the LLC. The limitation of liability would naturally not extend to any personal guarantees of company debts by a member. For example, assume that a member personally guarantees a company loan of $100,000. The member is, thereafter, personally liable for the repayment. The member's liability arises not because the person is a member of the company but because the member personally guaranteed the loan to the company.

As of January 1996, 48 states and the District of Columbia permit LLC's to be formed under their laws. Only Hawaii and Vermont had not yet enacted LLC legislation.

The purpose of this book is to aid the user in forming an LLC inexpensively. The normal cost of attorney fees for forming such a company is between $500.00 and $2,000. Therefore, even if some minor retyping or additions are added to the articles, the savings make use of this book and forms herein should make the process worthwhile.

II. FORMATION

As a statutory creation, an LLC can only be formed by strict compliance with the state law under which it is being created. LLC's, just as corporations and limited partnerships, require a public filing of formation documents with the secretary of state. The articles of organization document is an application for a license to do business as an LLC in the state. Once the articles are accepted and filed, the LLC is thereafter formed. While each state sets its own requirements for the contents of the articles, they all require:

  1. A name for the company that does not mislead the public but does disclose that it is an LLC.
  2. The address of the company's principal place of business.
  3. The name and address of the company's registered agent in the state.

Several states also require the following additional provisions be included in the articles:

  1. How capital contributions will be made to the company.
  2. Whether the company will be treated as a corporation or a partnership for tax purposes.
  3. The name and address of each organizer.
  4. Whether all the members or a centralized management team will manage the company.

The articles of an LLC can contain virtually anything that the LLC wants to put in them that does not violate state law. There is a reason the LLC might want certain inclusions in the articles rather than in the operating agreement. Once stated in the articles, they cannot easily be changed: the articles have to be amended. Most articles, however, only contain the bare basics required under state law.

A. ORGANIZERS

Most states, Texas being a major exception, require an LLC to have more than one owner. This differs from corporation requirements which allow only one shareholder. Several states permit only one person to form an LLC but the company will not be given effect until it has more than one member. Most of the states that require a company to have two or more members also require that two or more persons sign the articles of organization or a subscription agreement prior to filing of the articles. If a company falls below the minimum number of members for an LLC, the company will not only be dissolved but will lose the limited liability shield for its members. The shield will still exist, however, for a reasonable and limited time to allow the surviving member to retire the company. If the company does not have at least two members, it cannot be considered a partnership for tax purposes.

B. NAME OF THE LIMITED LIABILITY COMPANY

Obviously, the Articles must state the name of the LLC. The name of a proposed LLC must not be so similar to an existing LLC or any other company as to be confusing. In addition, most states require that the name of the company include the words "limited liability company" or the initials "LLC" or "LC." Should the name become confused with another company, the LLC can be sued for trade infringement. To avoid that confusion, unless absolutely sure that no other LLC has a similar name, the organizer should contact the state's secretary of state for a name search. Sometimes it's free, but usually the secretary of state will charge for a name search and will reserve a proposed available name for the new LLC.

In each state there are attorney service companies located near the state's capital that will do the name search and reservation along with filing the articles for a slight fee (usually $50). This a bargain when the organizer does not live near the secretary of state's office. The attorney service companies can be found in a phone book for the state capital.

C. PURPOSE

Many states require that articles state the purpose for which the LLC is formed. Most states will accept a simple statement that the LLC is formed to do any business which is legal. The articles contained in this book have a purpose provision.

D. MANAGEMENT

The states of Colorado, Florida, Minnesota, Nevada, West Virginia and Wyoming require the articles to state if the company has an agreement to continue in affect upon the death, bankruptcy or withdrawal of a member. Several states require the articles to contain a provision stating whether or not the company is to be managed by elected managing members. If the company is to be managed by elected managers, their names and addresses must be stated in the articles. If the management is reserved to all the members, all of their names and addresses must be listed. Most states do not require the names of the managers or the members to be stated in the articles.

E. NUMBER OF MEMBERS

While an LLC could have any number of members, it probably should not have more than 35 members (a husband and wife are counted as one member). This book is intended for use in changing an existing business into an LLC or for forming a new but small LLC. If the number of members exceeds 35, the LLC may have to register with the SEC to sell its membership interests. Such registration can easily cost $100,000. If the LLC is intended to have more than 35 members, it should consult an attorney because the members are entering a sensitive and complicating area.

While the Articles may state any number of members, it probably should not exceed the number permitted under state law for an exemption from security registration. The Security and Exchange Act (SEA) will exempt from federal registration the initial sale of an LLC's membership interest if it is made to less than 35 members (See Securities Chapter). Some states, however, limit an LLC to as few as five members in order to qualify their an exemptions for registration. Before any membership interests are sold the organizer should contact the state's corporation commissioner and ask whether a form is needed to be filed. This matter is discussed in more detail in the security section. Usually, it is only a formality when an existing business is being reformed or a new business is being formed by family members or close friends.

F. TERM

One of the major differences between an LLC and a corporation is that the LLC cannot have perpetual existence. Several states require that an LLC last no more than 30 years. The remaining states all require that the articles contain a specific date for its termination. The articles in this book are written for a company with a termination date 30 years from the date of its formation. If later the members wish to extend the company beyond 30 years in states which do not restrict the term to 30 years, they can file an amendment. The point to bear in mind is that the company cannot have a perpetual existence. The articles must list a clear, definable termination date.

III. WHERE TO FILE ARTICLES OF ORGANIZATION

ALABAMA

Alabama is unique. It is the only state in which the organizers do not file the articles directly with the secretary of state or a department of corporations. Instead, the organizers file the articles and two copies with the probate judge of the county where the company will have its registered office. The judge issues a certificate of formation to the organizers. Within 10 days of the filing of the articles, the probate judge sends the original articles to the secretary of state.

ARIZONA

Corporations Commission

Phoenix, Arizona 85007

ARKANSAS

Secretary of State

Little Rock, AR 72203

COLORADO

Secretary of State

Denver, CO 80203

CONNECTICUT

Secretary of State

Hartford, CT 06115

DELAWARE

Secretary of State

Dover, DE 19901

FLORIDA

Secretary of State

Tallahassee, FL 32304

GEORGIA

Secretary of State

Atlanta, GA 30334

IDAHO

Secretary of State

Boise, ID 83720

ILLINOIS

Secretary of State

Springfield, IL 62706

INDIANA

Secretary of State

Indianapolis, IN 46204

IOWA

Secretary of State

Des Moines, IA 50319

KANSAS

Secretary of State

Topeka, KS 66612

LOUISIANA

Secretary of State

Baton Rouge, LA 70804

MARYLAND

State Dept. of Assessments & Taxation

Baltimore, MD 21200

MICHIGAN

Department of Commerce,

Corporations Division

P. O. BOX 30054

Lansing, MI 48909

MINNESOTA

Secretary of State

St. Paul, MN 55155

MISSOURI

Secretary of State

Jefferson City, MO 65101

MONTANA

Secretary of State

Helena, MT 59601

NEBRASKA

Secretary of State

Lincoln, NE 68509

NEVADA

Secretary of State

Carson City, NV 89701

NEW HAMPSHIRE

Secretary of State

Concord, NH 03301

NEW JERSEY

Secretary of State

Trenton, NJ 08625

NEW MEXICO

State Corporation Commission

Santa Fe, NM 87501

NORTH CAROLINA

Secretary of State

Raleigh, NC 27611

NORTH DAKOTA

Secretary of State

Bismarck, ND 58501

OKLAHOMA

Secretary of State

Oklahoma City, OK 73152

OREGON

Corporations Commissioner

Salem, OR 97310

RHODE ISLAND

Secretary of State

Providence, RI 02903

SOUTH DAKOTA

Secretary of State

Pierre, SD 57501

TEXAS

Secretary of State

Austin, TX 78711

UTAH

Division of Corporations

and Commercial Code

P. O. Box 4581

Salt Lake City, UT 84145

VIRGINIA

State Corporations Commissioner

Richmond, VA 23203

WEST VIRGINIA

Secretary of State

Charleston, WV 25305

WISCONSIN

Secretary of State

Madison, WI 53702

WYOMING

Secretary of State

Cheyenne, WY 82001


IV. BASIC ARTICLES OF ORGANIZATION AND CERTIFICATE OF FORMATION (ORGANIZATION) FOR THE JURISDICTIONS PERMITTING LLC'S

As of January 1996, 48 states and the District of Columbia have adopted a Limited Liability Company Act (Hawaii and Vermont are the only states still to enact an LLC ACT). The LLC Acts of these jurisdictions are very similar. Most of the states based their LLC Act on the Wyoming's LLC Act because it pioneered the LLC concept.

The LLC Act of each state specifies certain minimum requirements. All states will allow the LLC organizers to include whatever additional clauses they may want in their articles of organization. Consequently, there is included immediately hereafter and this book forms that are valid and totally acceptable with the entities with LLC laws There are a couple of items to be noted. Most states call the filings "articles of organization"; however, some states (Delaware, Massachusetts, New Hampshire, Pennsylvania and New Jersey) call them either a "Certificate of Formation or a Certificate of Organization." A second item to note is that Louisiana alone also requires immediate filing of an initial report with the LLC's Articles.

The forms for the Articles contained in this books are set forth as a follows:

  1. For states that have the same requirements for formation, under their LLC Acts, one generic form is used for these states, which are identified.
  2. For each state which has specific formation requirements, a separate set of Articles is presented.

The Articles, contained in this book, are presented in the following sets:

  1. A generic set which can be used in most states that call the formation document Articles of Organization rather than a Certificate of Organization. More specific forms, tailored to the specifics of the particulars follow.
  2. Georgia, Iowa, Maryland, Oklahoma, Virginia and West Virginia.
  3. Alaska, Arizona, Arkansas, Colorado, Indiana, Kentucky, Maine, Michigan, Montana, New Mexico, North Carolina, Ohio, Oregon, Texas and Utah.
  4. Florida, Nebraska, South Dakota and Wyoming.
  5. Delaware, Louisiana, Mississippi, Nevada, New Hampshire, New Jersey, Rhode Island and Washington.
  6. Alabama, Connecticut, Illinois, Kansas, Minnesota, Missouri, North Dakota and Wisconsin.
  7. New York
  8. Tennessee
  9. California, Idaho


ARTICLES OF ORGANIZATION

OF

______________________________________________

I. NAME OF LIMITED LIABILITY COMPANY

The name of the limited liability company formed herein is _________________________________

II. PURPOSE

The purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized under the Limited Liability Company Law of the State of ________________________ other than the banking business or the trust company business.

III. MANAGEMENT

(SELECT ONE)

Under the terms of its operating agreement, the management of the company shall be reserved solely to its members. The names and addresses of the initial members of the company are: __________________________________________________________________________________ _________________________________________________________________________________ __________________________________________________________________________________

Under the terms of its operating agreement, the management of the company shall be by elected managers. The names and addresses of the initial managers of the company are: ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________

IV. AGENT FOR SERVICE OF PROCESS

The name and address in the State of ______________________ the limited liability company's initial agent for service of process is:

In the event that the agent resigns or cannot be found or served with responsible diligence, the Division of Corporations of Secretary of State is appointed as the successor registered agent for the company pursuant to state law.

I hereby accept the appointment as registered agent for the in accordance with the law of the State of __________________________.

V. TERM

(SELECT ONE IN ACCORDANCE WITH STATE LAW.)

The limited liability company shall have perpetual existence from the date of the filing of these Articles of Organization.

YES ( ) NO ( )

**** end of partial view of this section ****


VI. BASIC ARTICLES OF ORGANIZATION

FOR ALASKA ET AL

The following are the basic forms for the articles of organization that can be used in the following states and the District of Columbia:

ALASKA ARIZONA ARKANSAS COLORADO

INDIANA KENTUCKY MAINE MICHIGAN

MONTANA NEW MEXICO N. CAROLINA OHIO

OREGON S. CAROLINA TEXAS UTAH

A general generic set is provided that can be used in these states along with more specific sets that can be more tailored to individual state law. The selection of the form is left to convenience of the reader.

These states require that the articles contain a provision stating whether the company will be managed by elected managers or by the body of members themselves. If the management is by elected managers, the names and addresses of all the elected managers must be listed and if management is reserved for the members, the names and addresses of all the members must be listed. The articles for both forms of management are presented.

Arizona, Arkansas and Ohio require the articles to contain a statement that the company has or will have two or more members upon formation. This is optional for all other states. This is accomplished by typing in the additional provision:

(a) NUMBER OF MEMBERS: This company has or will have two or more members upon formation and will always maintain at least two members.

Montana requires the profession to be stated in the articles if a professional limited liability company is formed. This can be done by adding:

(a) PROFESSION OF COMPANY: The company will engage in the following profession:

Utah requires the articles to contain the signature of the registered agent accepting the appointment. The other states do not contain this requirement. This can be done by adding:

(a) CONSENT OF AGENT: I agree to serve as registered agent for the company.

Signed: Dated:

The states of Arkansas, Indiana, Kentucky, New Mexico, Ohio and Oregon permit a limited liability company to have perpetual existence rather than a fixed termination date. If the limited liability company is to have a perpetual existence, then type "N/A" in the space under Paragraph V, TERM. Under Paragraph VIII, ADDITIONAL PROVISIONS, type "TERM: The limited liability company shall have perpetual existence."

Additional clauses can be added as desired.


ARTICLES OF ORGANIZATION

OF

_______________________________

I. NAME OF LIMITED LIABILITY COMPANY

The name of the limited liability company formed herein is__________________________________

II. PURPOSE

The purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized under the Limited Liability Company Law of the State of ____________________ other than the banking business or the trust company business.

III. MANAGEMENT

Under the terms of its operating agreement, the management of the company shall be reserved solely to its members. The names and addresses of the initial members of the company are: _______________________ _______________________________________________________________________________________________________________________________________________________________________________

IV. AGENT FOR SERVICE OF PROCESS

The name and address in the State of _________of the limited liability company's initial agent for service of process is: _______________________________________________________________________

In the event that the agent resigns or cannot be found or served with responsible diligence, the Division of Corporations or Secretary of State is appointed as the successor registered agent for the company pursuant to state law.

I hereby accept the appointment as registered agent for the in accordance with the law of the State of ._______________________________________

V. TERM

The limited liability company shall terminate and dissolve on ____________________ , a date no later than 30 years from the date of the execution of these Articles of Organization.

VI. NAMES AND ADDRESSES OF THE ORGANIZERS

The names and addresses of each of the organizers who prepared and signed these Articles of Organization are: ____________________________________________________________________________________ ____________________________________________________________________________________

*** end of partial view of this section ***


VII. BASIC ARTICLES OF ORGANIZATION

FOR FLORIDA ET AL

The following are the basic forms for the articles of organization that can be used in the following states:

FLORIDA NEBRASKA SOUTH DAKOTA WYOMING

These states require that the articles contain a provision stating whether the company will be managed by elected managers or by the body of members themselves. If the management is by elected managers, all of the managers must be listed. If management is reserved for all the members, the names and addresses of all the members must be listed. The articles for both forms of management are presented.

Included in these articles are clauses for adding new members and for continuing the company. The organizers must choose. Restrictions on the right to add new members or continue the business may affect the company's worth, but they may also keep the company from being treated as a corporation for tax purposes (review the tax chapter).

In addition to the above requirements, these states require the articles also to state the total contributions the members have made or have agreed to make to the company for their membership interests. The other states which permit LLC's do not require this provision although it might be added as an optional provision in the articles of those other states. These four states require the specific contributions that have been or will be made to be stated in the articles. If contributions will be or might be made, the time of the contribution and the condition for making the contribution must be stated. Usually the members will not be required to make additional contributions, and the provision in the article can be marked "none" or "not applicable."

Members can include any additional provisions in the articles that they wish as long as the provisions do not violate state law. The provisions which are included in the articles can thereafter only be changed by filing an amendment to the articles with the secretary of state.


ARTICLES OF ORGANIZATION

OF

______________________________________

I. NAME OF LIMITED LIABILITY COMPANY

The name of the limited liability company formed herein is __________________________________

II. PURPOSE

The purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized under the Limited Liability Company Law of the State of ________________other than the banking business or the trust company business.

III. MANAGEMENT

Under the terms of its operating agreement, the management of the company shall be reserved solely to its members. The names and addresses of the initial members of the company are:

IV. AGENT FOR SERVICE OF PROCESS

The name and address in the State of ________________ of the limited liability company's initial agent for service of process is: ____________________________________________________________________

In the event that the agent resigns or cannot be found or served with responsible diligence, the Division of Corporations or Secretary of State is appointed as the successor registered agent for the company pursuant to state law.

V. TERM

The limited liability company shall terminate and dissolve on _______________ , a date no later than 30 years from the date of the execution of these Articles of Organization.

VI. NAMES AND ADDRESSES OF THE ORGANIZERS

The names and addresses of each of the organizers who prepared and signed these Articles of Organization are: _______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

VII. INITIAL PRINCIPAL OFFICE OF THE LIMITED LIABILITY COMPANY

The limited liability company shall maintain its principal and registered office in the state at the following address: __________________________________________________________________________________

VIII. CONTRIBUTIONS

The members of the company have made the following contributions to the company:

MEMBER:____________________________________________________________________

CONTRIBUTION: _____________________________________________________________

MEMBER: ___________________________________________________________________

CONTRIBUTION: _____________________________________________________________

MEMBER: ____________________________________________________________________

CONTRIBUTION: _____________________________________________________________

MEMBER: ____________________________________________________________________

CONTRIBUTION: _____________________________________________________________

MEMBER: ____________________________________________________________________

CONTRIBUTION: ______________________________________________________________


VIII. BASIC ARTICLES OF ORGANIZATION FOR DELAWARE ET AL

The following are the basic forms for the articles of organization that can be used in the following states:

DELAWARE LOUISIANA MASSACHUSETTS

MISSISSIPPI NEW HAMPSHIRE NEW JERSEY

PENNSYLVANIA RHODE ISLAND WASHINGTON

Most of these states refer to the formation document as a Certificate of Formation or Organization rather than Articles of Organization.

The generic form can be in most of these states but specific forms are also included for those states that have specific requirements.

These states have additional requirements that are different from those of other states, so they are covered separately.

Members can include any additional provisions in the articles that they wish, as long as the provisions do not violate state law. The provisions which are included in the articles can thereafter only be changed by filing an amendment to the articles with the secretary of state.

Louisiana requires the names of the company's managers or its members to be listed. Therefore, the articles for Louisiana are written in both cases as it has been done for the other states that have this requirement. Much of the information that other states require in the articles is required by Louisiana in a separate document called the "initial report." Following the articles for Louisiana is an initial report that covers the information Louisiana requires.

Rhode Island alone requires the organizers to state whether the company will be treated as a corporation or partnership for federal tax purposes. Most states including, Mississippi and Washington, permit an LLC to have perpetual existence. If a fixed term of life is required or desired, mark "NO" in Article V and complete the blank with the termination date.


CERTIFICATE OF FORMATION

OF

______________________________________________

I. NAME OF LIMITED LIABILITY COMPANY

The name of the limited liability company formed herein is_________________________________

II. PURPOSE

The general purpose of the limited liability company is to _____________________________________

___________________________________________________________________________________________________________________________________________and is also authorized engage in any lawful act or activity for which a limited liability company may be organized under the Limited Liability Company Law of the State of ___________________other than the banking business or the trust company business.

III. MANAGEMENT

(Select One)

Under the terms of its operating agreement, the management of the company shall be reserved solely to its members. The names and addresses of the initial members of the company are: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Under the terms of its operating agreement, the management of the company shall be by elected managers. The names and addresses of the initial managers of the company are: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

IV. AGENT FOR SERVICE OF PROCESS

The name and address in the State of _____________________ of the limited liability company's initial agent for service of process is: ______________________________________________________________________________________

In the event that the agent resigns or cannot be found or served with reasonable diligence, Division of Corporations or the Secretary of State is appointed as the successor registered agent for the company pursuant to state law.

I hereby accept the appointment as registered agent for the ______________________________________in accordance with the law of the State of _________________.

V. TERM

(Select One in Accordance with State Law)

The limited liability company shall have perpetual existence from the date of the filing of these Articles of Organization.

YES ( ) NO ( )

The limited liability company shall terminate and dissolve on ,a date no later than 30 years from the date of the execution of these Articles of Organization.


IX. BASIC ARTICLES OF ORGANIZATION FOR ALABAMA ET AL

The following are the basic forms for the articles of organization that can be used in the following states:

ALABAMA CONNECTICUT ILLINOIS KANSAS

MINNESOTA MISSOURI NEVADA NORTH DAKOTA

WISCONSIN

These states require that the articles contain a provision stating whether the company will be managed by elected managers or by the body of members themselves. If the management is by managers, the names and addresses of all the elected managers must be listed. If the management is by all of the members, all members must be listed. The articles for both forms of management are presented.

Included in these articles are clauses for adding new members and for continuing the company after the disassociation of a member. The organizers must choose. Restrictions on the right to add new members or continue the business may affect the company's worth, but they may also keep the company from being treated as a corporation for tax purposes (review the tax chapter for a discussion on the effects of making these elections).

Illinois is the only state which requires the articles to contain a non-statutory ground for dissolving the company and the members have agreed. One such ground could be when the company achieves a desired goal; for example, building and selling a building. If there are no non-statutory grounds for dissolution, then fill in "none." This provision may be omitted for the other states if the organizers wish by retyping the page without it and renumbering subsequent pages.

Members can include any additional provisions in the articles that they wish as long as the provisions do not violate state law. The provisions which are included in the articles can thereafter only be changed by filing an amendment to the articles with the secretary of state.

The states of Alabama and Missouri permit a limited liability company to have a perpetual existence. If the company is to have a perpetual existence rather than a fixed length of time, type "N/A" in the space under Paragraph V, TERM. Then type under Paragraph VIII, ADDITIONAL PROVISIONS, "The limited liability company shall have perpetual existence."

North Dakota requires that the articles contain a statement that the company will have at least two members when formed. Under Paragraph VIII, ADDITIONAL PROVISIONS, type: "NUMBER OF MEMBERS: The limited liability company shall have and shall maintain at all times at least two members."


ARTICLES OF ORGANIZATION

OF

____________________________

I. NAME OF LIMITED LIABILITY COMPANY

The name of the limited liability company formed herein is ___________________________________

II. PURPOSE

The purpose of the limited liability company os to engage in any lawful act or activity for which a limited liability company may be organized under the Limited Liability Company Law of the State of ____________________other than the banking business or the trust company business.

III. MANAGEMENT

Under the terms of its operating agreement, the management of the company shall be reserved solely to its members, including the right to contract debts for the company. The names and addresses of the initial members of the company are:

IV. AGENT FOR SERVICE OF PROCESS

The name and address in the State of________________________ of the limited liability company's initial agent for service of process is: ______________________________________________________________

In the event that the agent resigns or cannot be found or served with reasonable diligence, the Division of Corporations or Secretary of State is appointed as the successor registered agent for the company pursuant to state law.

V. TERM

The limited liability company shall terminate and dissolve on ______________________, a date no later than 30 years from the date of the execution of these Articles of Organization.

VI. NAMES AND ADDRESSES OF THE ORGANIZERS

The names and addresses of each of the organizers who prepared and signed these Articles of Organization are: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

VII. INITIAL PRINCIPAL OFFICE OF THE LIMITED LIABILITY COMPANY

The limited liability company shall maintain its principal and registered office in the state at the following address: ______________________________________________________________________________________

VII. ADMISSION OF NEW MEMBERS

New members may be added to the company only with the unanimous consent of all the existing members. If a member sells or assigns an interest in the company, the purchaser or assignee is entitled to all of the financial rights of the selling or assigning member in the company. The purchaser or assignee IS ( ) IS NOT ( ) permitted to participate in the management of the company without the consent of a majority of the non-selling members.

IX. CONTINUATION OF BUSINESS

Under the terms of the operating agreement, the members MAY ( ) MAY NOT ( ) continue the business without dissolution upon the death, expulsion, resignation or withdrawal of a member from the company WITH ( ) WITHOUT ( ) the consent of all of the remaining members.

X. NON-STATUTORY GROUNDS FOR DISSOLUTION

The members agree that the non-statutory grounds for dissolution of the company are as follows: ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

**** end of partial view of this section ****


BASIC ARTICLES FOR NEW YORK

New York differs from the other states in two aspects. It requires that the articles contain a provision designating the Secretary of State as agent for service of process and listing a post office box where the Secretary of State can mail a copy of any process served.

Since the Secretary of State must be named as the agent for service of process, the designation of a resident agent is optional. It is a good idea however to name a registered agent. In the event of a lawsuit service can be made on the agent. Consequently, the company will now of the lawsuit sooner and have more time to prepare before an answer to the complaint must be filed.

New York also permits an LLC to have perpetual existence. Not all states permit perpetual existence of their LLC's.


ARTICLES OF ORGANIZATION

OF

______________________________________________

I. NAME OF LIMITED LIABILITY COMPANY

The name of the limited liability company formed herein is _________________________________

II. PURPOSE

The purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized under the Limited Liability Company Law of the State of NEW YORK other than the banking business or the trust company business.

III. MANAGEMENT

Under the terms of its operating agreement, the management of the company shall be reserved solely to its members, including therein the right to contract debts for the company. The names and addresses of the initial members of the company are:

IV. RESIDENT AGENT

The name and address in the State of New York of the limited liability company's initial resident agent is: ____________________________________________________________________________

V. AGENT FOR SERVICE OF PROCESS

The Secretary of State of New York is hereby appointed the agent for service of process for the company. The Secretary of State may mail such process received on behalf of the company to:

VI. TERM

The limited liability company shall ( ) have perpetual existence.

( ) terminate and dissolve on ________________, a date no later than 30 years from the date of the execution of these Articles of Organization.

VII. NAMES AND ADDRESSES OF THE ORGANIZERS

The names and addresses of each of the organizers who prepared and signed these Articles of Organization are: ____________________________________________________________________________________ _____________________________________________________________________________________ ____________________________________________________________________________________

VIII. INITIAL PRINCIPAL OFFICE OF THE LIMITED LIABILITY COMPANY

The limited liability company shall maintain its principal and registered office in the state at the following address: ___________________________________________________________________________________

IX. NUMBER OF MEMBERS

The limited liability company shall have at formation and maintain thereafter at least two members.

**** end of partial view of this section ****


BASIC ARTICLES FOR TENNESSEE

Tennessee has a few unique provisions in its limited liability act. The following articles are designed to meet the basic requirements. Tennessee requires that the articles state whether creditors or members are given preemptive rights for loans to the company: Are the members or creditors given rights to control or influence the company's decisions? The answer will be "no" for most companies because such rights seriously impair the rights of the other members to protect their investment. The organizers can add additional provisions as desired.


ARTICLES OF ORGANIZATION

OF

_____________________________________

I. NAME OF LIMITED LIABILITY COMPANY

The name of the limited liability company formed herein is _________________________________

II. PURPOSE

The purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized under the Limited Liability Company Law of the State of Tennessee other than the banking business or the trust company business.

III. MANAGEMENT

Under the terms of its operating agreement, the management of the company shall be reserved solely to its members, including therein the right to contract debts for the company. The names and addresses of the initial members of the company are: ____________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________

IV. AGENT FOR SERVICE OF PROCESS

The name and address in the State of Tennessee of the limited liability company's initial agent for service of process is: __________________________________________________________________________________

In the event that the agent resigns or cannot be found or served with reasonable diligence, the Division of Corporations or Secretary of State is appointed as the successor registered agent for the company pursuant to state law.

V. TERM

The limited liability company shall terminate and dissolve on ______________________ , a date no later than 30 years from the date of the execution of these Articles of Organization.

VI. NAMES AND ADDRESSES OF THE ORGANIZERS

The names and addresses of each of the organizers who prepared and signed these Articles of Organization are: _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________

VII. INITIAL PRINCIPAL OFFICE OF THE LIMITED LIABILITY COMPANY

The limited liability company shall maintain its principal and registered office in the state at the following address: ____________________________________________________________________________________


ARTICLES FOR CALIFORNIA AND IDAHO

California and Idaho are unique in that these are the only states that have mandated specific forms which must be used as the articles of organization for any LLC being formed in their territory. Idaho also has a special form of articles for a professional LLC.

The forms are available on the WordPerfect 6.1 book version not the WordPerfect 5.1 version becuase it could not be scanned into the text.

The California forms can be obtained from the

California Secretary of State

Limited Liability Company Unit

P.O. Box 944228

Sacramento, CA. 94244-2280

The Idaho form can be obtained from the

Secretary of State

Statehouse, Boise, Idaho 83720


CHAPTER 11

OPERATING AGREEMENT

I. DEFINITION

An operating agreement contains the rules adopted for the general day-to-day management and operation of the LLC. At the first meeting of members when the LLC is formed, the operating agreement is adopted by the organizer. The articles of organization establish the governing structure of the LLC. The operating agreement regulates the management of the business and general conduct of the LLC. It prescribes the rights and duties of the members among themselves in relationship to the management and affairs of the company.

The operating agreement is an attempt to cover areas of potential conflict within an LLC and to assign duties and responsibilities. The terms of the operating agreement can be of a general nature or closely tailored to meet the needs and desires of the members. Most operating agreements will contain or mention most of the issues covered in the enclosed sample operating agreement.

The terms of the operating agreement are not set in concrete. Members can alter or amend the operating agreement simply by holding a meeting to do so. The purpose of the operating agreement is to establish procedures for the daily administration and management of the LLC. As the LLC develops the operating agreement can be amended to keep pace with the new requirements of the LLC.

The operating agreement contained in this book is a basic agreement. The members can add clauses as they wish. The only limitation on adding clauses to the operating agreement is that the new clauses must not conflict with any of the terms of the articles of organization. All clauses of the operating agreement, including additional ones added by the members, control the management of the company and remain in effect until amended or repealed.

II. ADOPTION

A. AUTHORITY TO ADOPT

The LLC can adopt, amend and repeal terms of the operating agreement. An LLC has the inherent right to adopt an operating agreement whose terms are consistent with federal and state laws. On the other hand, an LLC cannot adopt an operating agreement whose terms are in conflict with the articles of organization, and terms must always be reasonable with regard to the responsibilities they address.

Many states that permit LLC's require the operating agreement to be in writing. The purpose behind the requirement for it to be in writing is so that there is an evidentiary statement of the provisions of the operating agreement. Should there be managing members and they fail to comply with the provisions of the operating agreement, the authority to perform those acts that are normally governed by the operating agreement automatically becomes vested in the members in total.

Failure to adopt an operating agreement can be fatal to the LLC. A court may determine that the failure to adopt an operating agreement proves, ipso facto, that a real LLC was never intended to be created. The prime proof of the existence of an LLC is the manner in which it is operated. A business that acts as a partnership will be treated as a partnership even though it is formed as an LLC. Not having an operating agreement, while permitted, is evidence that infers an LLC really was never intended. Not adopting an operating agreement may result in the LLC losing its shield against personal liability for the members. There is just no reason to endure such a risk. There is no real justification for not having an operating agreement. Not having an operating agreement could be used as evidence by creditors of the company that a real LLC was not intended. If the Court agrees, then the members would lose their shield against personal liability for the LLC's debts.

B. ADOPTION

The operating agreement must be adopted by a majority vote of the members. A meeting of members is called and the proposed agreement is accepted by the LLC if a majority of the members approve it. The procedure for adopting or changing the operating agreement is by a majority vote of the managing members of the LLC where they approve the amendment or repeal specific provisions and adopt new clauses. There are some provisions in the operating agreement, however, that can only be changed by amending the articles of organization. Any change of a provision in the operating agreement that relates to a clause in the articles will only become effective when the articles are also amended to incorporate the change. For example, many states require that the articles state whether the company will be managed by all of the members or if it will be administered and operated by a group of elected managing members. A company formed, in such states, that might wish later to change its form of management must amend both the operating agreement and the articles.

NOTE: the articles may restrict or eliminate the power of the members to adopt, alter, amend or in any way affect the operating agreement as long as the provision does not violate state law.

III. CONSTRUCTION

A LLC is required to construe the provisions contained in the operating agreement reasonably and in a way that sustains their validity. When a provision in an operating agreement is subject to different constructions, the one most in harmony and accordance with state law is the one given effect. Nothing in an operating agreement can overrule or violate the articles of an LLC. For this reason, all of the provisions of an operating agreement must be construed in a manner that does not violate the articles. Any provision that cannot be so construed is automatically rendered void and invalid by operation of law.

Unless a provision of an operating agreement specifically states that it is intended to operate retroactively, it will not do so. In addition, no provision in an operating agreement can operate retroactively if it will unfairly and unreasonably violate rights of members. Example: A new provision changes the number of managing members of the company. The provision cannot be applied retroactively because it would invalidate every past action taken by the members.

IV. WAIVER OF TERMS OF THE OPERATING AGREEMENT

An operating agreement exists to govern the operation of the LLC and to protect the members. Just as the members can add new provisions to the operating agreement for their protection, they can waive that protection without having to actually repeal the entire operating agreement.

Members may agree to ratify conduct of the business that otherwise would violate provisions of the operating agreement. Without the inherent ability to waive provisions of the operating agreement, the members would not have the authority to perform the anticipated act. Ratification of the proposed or completed act requires the same number of members needed to adopt or repeal a provision of the operating agreement. Example: A provision requires a managing member to obtain approval from a majority of members before executing a contract on behalf of the LLC. Without the majority approval the managing member executes a favorable contract for the LLC. The contract is invalid unless a majority of the members ratify the managing member's conduct that was in violation of the operating agreement.

V. LOCATION

The operating agreement of an LLC in either original form or true copies as amended is required to be kept at the principal executive office in every state where the LLC does business. The operating agreement is required to be kept open for inspection by the members at all reasonable times during regular business hours. When the principal place of business is outside the state of formation, most states require the LLC to furnish copies of the current operating agreement as amended to members upon request.

The next few pages contain a complete operating agreement for an LLC. It is both valid and acceptable in all jurisdictions that have statutes permitting LLC's.


OPERATING AGREEMENT

OF

________________________________

LIMITED LIABILITY COMPANY

This is the Operating Agreement of _____________________________________________ Limited Liability Company, a limited liability company, hereinafter titled the Company, which has been organized pursuant to the Limited Liability Company Act of the State of . This Operating Agreement is entered and shall be effective upon execution by and among the Company and the persons executing this Agreement, hereinafter titled Members.

ARTICLE I

FORMATION

1.01 ORGANIZATION. The company shall be organized as a limited liability company pursuant to the limited liability company laws of the State of .

1.02 AGREEMENT. In consideration of the mutual covenants herein contained, the Members agree to be bound by the terms and conditions of this Operating Agreement as written and as it may from time to time be amended.

1.03 NAME. The name of the Company shall be .

1.04 TERM. The Company shall be dissolved and discharged in accordance with this Operating Agreement and State Law on unless the term of the Company is extended pursuant to State law or the Company is earlier dissolved and discharged in accordance with State law or the terms of this Operating Agreement.

1.05 PRINCIPAL OFFICE. The principal office of the Company shall be located at _________________ _____________________________________________________________until changed by the Members.

1.06 PURPOSE. The Company shall engage in any lawful business for which a limited liability company can be formed. Specifically, the Company intends to engage in the following business: __________________________ ______________________________________________________________________________________________________________________________________________________________________________

ARTICLE II

MEMBERS

2.01 NAMES AND ADDRESSES. The names and addresses of the members shall be set forth in an attachment to this Operating Agreement entitled Exhibit A.

2.02 ANNUAL MEETINGS. All annual meetings of the Members shall be held at the principal office of the limited liability company in the City of or at such other place as designated by the Members. Special meetings may be held at such time and place within or without the State of as shall be stated in the notice of meetings or in a duly executed waiver of notice thereof.

2.03 ANNUAL MEETINGS ARE TO HELD. Annual meetings of Members commencing with the year shall be held each year within 120 days following the close of the Company's tax year.

2.04 SPECIAL MEETINGS. Special meetings of the Members for any purpose unless otherwise prescribed by statute or by the articles of incorporation may be called by a majority of the Members or at the request in writing given to all Members by any Member owning a majority interest in the capital account of the Company. Such request shall state the purpose of the proposed meeting. Notice shall be deemed given at the time it is delivered personally or deposited in the mail or sent by other means of written communication to each Member at the last known Company address for each member.

2.05 BUSINESS AT MEETINGS. Business transacted at any special meeting of Members shall be limited to the purpose stated in the notice calling the special meeting.

2.06 QUORUM. The holders of a majority interest in the company as based on their capital contribution to the Company in relation to the total capital contribution of all Members and entitled to vote if present in person or represented by proxy shall constitute a quorum at all meetings of the Members for the transaction of business except as otherwise provided by statute or by the Articles of Organization. If a quorum is initially present, the Members may continue to transact business until adjournment, notwithstanding the withdrawal of enough Members to leave less than a quorum, if any action taken is approved by a majority of the Members required initially to constitute a quorum.

2.07 MEETING WHEN QUORUM PRESENT. When a quorum is present or represented at any meeting, the vote of the holders of a majority of the membership interests in the Company as based upon their capital contribution in relation to the total capital contribution by the Members present in person or represented by proxy shall decide any question brought before such meeting unless the question is one upon which by express provision of the statutes or of the Articles of Organization a different vote is required in which case such express provision shall govern and control the decision of such question.

2.08 VOTING. Only persons in whose names membership interests entitled to vote stand in the membership records of the limited liability company on the day of any meeting of Members shall be entitled to vote at such meeting.

2.09 PROXIES. At any meeting of the members any Member may be represented and vote by a proxy or proxies appointed by an instrument in writing. In the event that any such instrument shall designate two or more persons to act as proxies a majority of such persons present at the meeting or if only one shall be present that one shall have and may exercise all of the powers conferred by such written instrument upon all of the persons so designated unless the instrument shall provide otherwise. No such proxy shall be valid after the expiration of six months from the date of its execution.

2.10 ACTION AT A MEETING. Any action except the election of the managing members that must be taken by vote of Members at a meeting may be taken without a meeting if authorized by the written consent of the Members holding at least a majority of the voting power unless the provisions of the statutes or of the Articles of Organization require a greater proportion of voting power to authorize such action, in which case such greater proportion of written consent shall be required.


CHAPTER 12

AFTERWARDS: POST-FORMATION ACTS

This chapter is an information chapter to remind the members managing an LLC of the various acts that may be required after formation. The members will already be familiar with most of these requirements if they have previously operated a business. The chapter summarizes general aspects most often encountered after forming a new business entity. It does not profess to cover each item in detail. References are made to the appropriate code sections when available.

Many of the post-formation acts pertain to tax filings. Members managing the LLC should work closely with the business' tax advisor to establish the appropriate accounting procedures for the LLC. Some matters can be handled by the LLC's accountant or bookkeeper; others must be accomplished by the members. An understanding of what is expected and by whom is important for the smooth operation of the business.

I. STATE LICENSES

A state may require a state license for a certain type of business whether the business is conducted in corporate form or not. For example, a state may require anyone disposing of hazardous waste to have a state license or permit to do so. The fact that the company doing the hauling is or is not an LLC is irrelevant. It is important that the LLC obtain all the necessary licenses and permits for the operation of its business in the state.

State permits are not transferable. If a partnership that has the necessary permits and licenses to do business changes its business form to an LLC, the LLC must apply for new state licenses and permits in its own name. The LLC is a legal entity in its own right and is treated separate and apart from the members and any business they may have previously operated.

II. LOCAL BUSINESS LICENSES

Many states, usually those that have corporate taxes, permit counties, parishes, cities and other government entities to raise revenue by taxing LLC's doing business in their jurisdictional area. The taxing usually takes one of two forms. The first is a straight license fee for a permit to do business. The second is a corporate income tax that the city and the county may charge to grant a business license. The LLC must determine if there is a city or county business license required to operate. Such licenses are required regardless of whether the business is a LLC or not.

III. EMPLOYER IDENTIFICATION NUMBER

The LLC as an employer must obtain a federal employer's identification number (EIN) from the IRS. The application is Employer Identification Number Form SS-4. Form SS-4 must be filed within seven days after the first payment of earnings to an employee. There is no filing fee for the form, and upon filing the IRS issues the LLC an identification number. This identification number will be used on all tax returns. The SS-4 and its instructions can be obtained from any IRS office or by mail by calling 1 (800) TAX FORMS.

IV. ESTIMATED TAX

A. FEDERAL INCOME TAX

Internal Revenue Code Section 6655, requires LLC's that are being treated taxwise as though they were corporations to pay to the IRS installments on estimated income tax. Corporations are required to make their estimated payments to an authorized commercial bank depository or a Federal Reserve Bank by the statutory payment dates. Accompanying the payment is Federal Deposit Form 8109. Instructions for the estimated tax are provided in IRS Form 1120W (Worksheet), "Corporation Estimated Tax."

B. STATE ESTIMATED TAX

An LLC that is being treated taxwise as a corporation must comply with the tax law of any state in which it does business. Therefore, if an LLC does business in a state that has a corporate tax, the LLC is taxed even though it might be formed out of state. Example: Nevada has no corporate income tax; California does. If a Nevada LLC does business in California, it must pay California tax on that portion of its income derived from its California operations.

California and most states that have corporate income taxes require an LLC doing business in the state to pay estimated income taxes. It is important for an LLC to know and comply if a state in which it is doing business requires the payment of estimated tax.

V. PERSONAL PROPERTY TAXES

Some states, such as California, tax the personal business property of a company ( whether a corporation, partnership or an LLC) that is located within the state. For this reason, some of the airlines doing business in California actually fly to Las Vegas or Reno just to park their aircraft so they will not be taxed in California.

An LLC should be aware of the personal property taxes that a state may charge for corporate assets located in the state. Usually the same taxes apply for the personal property of an LLC, a partnership, or a sole-proprietorship.

If the LLC expects to engage in the business of selling tangible personal property, the company must determine if it needs to obtain a sales and use tax permit. Generally, the states that have sales taxes presume that all gross receipts of personal property are subject to the sales tax. As with personal property taxes, it makes no difference what form the business entity takes. As long as goods subject to the tax are sold, sales tax must be charged.

VII. ANNUAL STATEMENT OF MANAGING MEMBERS

After a LLC is formed, several states, such as Louisiana, require that it file an annual statement of its managing members with the secretary of state. The state is thereby able to stay aware of and monitor the LLC. The information required on the statement includes the names and addresses of the members managing the company, the address of the registered office and the name and address of the registered agent.

VIII. EMPLOYEE CONCERNS

A. PAYROLL WITHHOLDING

A LLC, as with any other employer, must withhold income tax and social security tax from all employees' salary. Instructions for federal withholding are in the IRS Circular E, "Employer's Tax Guide." The LLC must have each employee complete the Employee's Withholding Allowance Certificate W-4. If the LLC is being treated as a corporation, the company must withhold payroll taxes on salaries and draws paid to its members. If an LLC is being treated taxwise as a partnership, the company does not withhold payroll taxes from payments made to its members. If an LLC is treated as a partnership for tax purposes, its members are required to make estimated payments of company earnings to the IRS and every state in which the company does business.

The withheld income and social security taxes are deposited in an authorized commercial bank depository or a Federal Reserve Bank along with Federal Deposit Form 8109. An "Employer's Quarterly Federal Tax Return" (Form 941) is required to be filed by the LLC before the end of the month following each quarter. If the taxes are not withheld or paid, any person whose duty it is to make the payments will be held 100% liable for the taxes. This can work a manifest injustice, but it remains the law.

In states which have income taxes, such as California, there must be state payroll withholding as well. It is important that the LLC understand its tax obligation for each state in which it will operate.


CHAPTER 13

MEMBER AGREEMENTS

This chapter contains three of the most common types of member agreements. The first agreement is a buy-sell agreement. The second is adoption of a medical plan. The third type is a purchase of life insurance on the members. These agreements are addressed separately from the LLC operating agreement. It is possible to include the terms and provisions in the actual LLC operating agreement. Incorporation of these provisions into the LLC operating agreement, however, makes it long and cumbersome. An advantage in having the enclosed agreements separate from the LLC operating agreement is that it allows the LLC flexibility in adopting the agreements with minimal effort.

A. BUY-SELL AGREEMENT

A frequent concern among members is what is to happen to the LLC in the event a member should die or a member should transfer his LLC interest. The LLC would have new members. The remaining original members may find themselves operating a business with people they do not like and with whom they do not wish to associate.

The common resolution to this dilemma is for the members to enter a members' agreement. The general form of this type of agreement gives surviving members the first right of refusal to purchase the shares of the LLC from the estate of a deceased member, usually for book value. In the same vein a member wishing to sell his LLC interest must first offer it to

the other members for the price that it would be sold to a third party. If the remaining members do not elect to buy the LLC interest, the selling member can sell it for the price offered to the members.

Following this chapter is a basic buy-sell agreement governing the situations discussed above. The buy-sell agreement can be as complicated as the parties wish and can include voting trusts, tax allocations and any other aspect the members may want. In the event of violation of the terms of the buy-sell agreement, the non-violating and non-breaching members can purchase the breaching member's LLC interest for book value as calculated under the agreement.

Buy-sell agreements provide for the continuity of the LLC. They add a degree of stability to the LLC. Many LLC's are family affairs, usually with a father and one or more children. Bad feelings can arise when a parent dies and the parent's interest in the business is inherited by children who have not participated in the business. The children who have participated in the business together with non-family members may not want to share the benefit of their work with the new members. Many LLC's have dissolved because the LLC could not integrate the new members.

The buy-sell agreement in this chapter is a skeletal form from which the parties may fashion their own agreement for this sensitive area.


MEMBERS' BUY-SELL AGREEMENT

Agreement made this first day of ____________ by and between _____________________________ ___________________________________________________________________________________ ___________________________________________________________________________________ being the Members of ___________________________________a Limited Liability Company created and existing under the laws of the State of ________________ with its principal place of business at ________________ ________________________, hereinafter titled the Limited Liability Company.

WHEREAS the parties hereto believe that the maintenance of harmonious management is in the best interest of the Limited Liability Company and the Members, and

WHEREAS it is the purpose of this Agreement (a) to require that the capital interest in the Limited Liability Company of a living Member who desires to dispose of it be offered first to the other Members for purchase, (b) to provide for purchase by the surviving Members of the Limited Liability Company interest of a deceased Member, and (c) to provide the funds necessary to purchase such interest,

NOW THEREFORE in pursuance of this purpose and in consideration of the mutual agreements and covenants contained herein it is hereby mutually agreed as follows:

ARTICLE 1

PURCHASED DURING LIFE

No Member during his lifetime shall in any way transfer or dispose of any portion of his capital Limited Liability Company interest by sale or otherwise unless the Member shall first offer to sell such Limited Liability Company interest to the other Members. Such offer shall be in writing, and a copy of said offer shall be sent to each of the Members. If such other Members elect to purchase any or all of such shares, the purchase shall be at a price determined in accordance with the provisions of ARTICLE 3. In the event the other Members have rejected said offer in whole or in part, either by written rejection or by failure to purchase all of said Limited Liability Company interest within thirty (30) days after receipt of the Member's offer to sell, the offering Member shall be entitled to sell to any person all or any portion of the remaining Limited Liability Company interest so offered.

ARTICLE 2

PURCHASE AT DEATH

Upon death of a Member, the Member's estate or the Member's successor-in-interest by reason of form of ownership shall sell and the surviving Members of the Limited Liability Company shall buy all of the Member's interest in the Limited Liability Company at a price determined in accordance with the provisions of ARTICLE 3.

ARTICLE 3

PURCHASE PRICE OF LIMITED LIABILITY COMPANY INTEREST

The price to be paid for the purchase of a Member's interest in the Limited Liability Company, as provided in ARTICLES 1 and 2, shall be determined periodically by mutual agreement of the Members. The initial purchase price of the Limited Liability Company interest hereby is agreed to be DOLLARS ($ ) for each percent of ownership in the Limited Liability Company as determined by the represented share of the Member's capital account. This price shall be redetermined within thirty (30) days following the close of each fiscal year of the Limited Liability Company and shall be based upon the net book value of the Limited Liability Company. Until such redetermination the prior value shall continue in effect; provided, however, in the event the Members have not agreed to such a redetermination within the period of eighteen (18) months prior to the death of a Member, the price shall be fixed by arbitration in the following manner: one arbitrator shall be named by the surviving Members and one by the representative of the decedent's estate within thirty (30) days after qualification of the executor or administrator of the estate of the deceased Member; if the two arbitrators cannot agree upon the price of each share within thirty (30) days after their appointment, the probate court shall appoint a third arbitrator, and the decision of the majority shall be made within thirty (30) days thereafter and shall be final on this issue.

ARTICLE 4

TERMINATION OF AGREEMENT

This Agreement shall terminate upon the dissolution, receivership, insolvency, or bankruptcy of the Limited Liability Company.

ARTICLE 5

PERSONS BOUND BY THIS AGREEMENT

All provisions of this Buy-Sell Agreement shall be binding upon, inure to the benefit of and be enforceable by and against the respective heirs, administrators, personal representatives, executors, assigns and successors in interest of the Members.

ARTICLE 6

MISCELLANEOUS

6.A. SURVIVAL OF REPRESENTATIONS. The covenants, warranties, representations and other written statements set forth in this Agreement or in any exhibit hereto shall survive the execution and delivery hereof and formation of the Limited Liability Company. All of the same shall be deemed to be independently material and reliable by the party to whom made.

6.B. ATTORNEY FEES. If legal action is commenced over the terms of this Buy-Sell Agreement, it is agreed that the prevailing party shall be entitled to reasonable attorney fees and costs.

6.C. GOVERNING LAW. This Agreement and all of its terms and conditions shall be governed in accordance with the laws of the State of .

6.D. CONSTRUCTION. None of the provisions of this Buy-Sell Agreement shall be for the benefit of or enforceable by any creditors of the Limited Liability Company.

6.E. FURTHER ASSURANCES. Each of the Members hereafter shall execute and deliver such further instruments and do such further acts and things as may be required or useful to fulfil the intents and purposes of this Agreement that are not inconsistent with the terms hereof.

6.F. ENTIRE AGREEMENT AND AMENDMENT. This Buy-Sell Agreement incorporates the entire agreement and understanding among the Members with respect to the subject matter. This Agreement may not be modified or amended except with the written consent of all Members.

B. ADOPTION OF A MEDICAL PLAN

The delivery and payment of health care is changing. Addressing inadequacies in the health care system has been of national importance since the 1992 Congressional elections. Various national plans have been proposed all of which share the requirement that all businesses to carry health insurance for employees. If the limited liability company has employees, it may be required to furnish them with health coverage. The issue is unclear. Under the law, partners are not considered employees. Therefore, whether a LLC may be required to furnish health coverage for its partners remains to be clarified. Given the avowed purpose of the proposed health plans to provide coverage for everyone, the LLC may be required to provide coverage at the very least for those members who participate in the LLC's daily management and control.

When the LLC is treated as a partnership, the value of medical insurance is attributed to the member as a distribution of income. There usually is not much benefit for the LLC to adopt a medical plan unless it can get group rates or it is necessary to provide coverage for non-member employees. Many states are also considering requiring employers to provide medical insurance for their employees. Following this chapter is a basic medical expense payment and reimbursement plan. The LLC need not use this plan, may instead adopt its own plan or not adopt one at all. It is important to remember that the plan may not discriminate between the coverage for highly paid and lower paid workers.


MEMBERS' MEDICAL PLAN AGREEMENT

Agreement made this __________ day of _______________ by and between ____________________ ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ being the Members of ___________________________________________ a Limited Liability Company created and existing under the laws of the State of _____________________________with its principal place of business at ________________________________________________________________________________________ hereinafter titled the Limited Liability Company.

WHEREAS the parties hereto believe that the maintenance of harmonious management is in the best interest of the Limited Liability Company and the Members, and

WHEREAS in order to maximize employee efficiency, productivity, improve employee health, welfare and morale the Limited Liability Company finds that it is in its best interest to adopt a Medical Expense Payment and Reimbursement Plan, hereafter titled the Plan. The plan will be created pursuant to Section 105(b) of the Internal Revenue Code of 1986, as amended.

NOW THEREFORE in pursuance of this purpose and in consideration of the mutual agreements and covenants contained herein it is hereby mutually agreed as follows:

ARTICLE 1

ADOPTION OF A MEDICAL PLAN

The Plan adopted herein shall reimburse qualified employees for the medical expenses incurred by them. Coverage under the Plan shall also extend to a qualified employee's spouse, children and dependents as defined in Section 152 of the Internal Revenue Code, provided those persons are members of the employee's household at the time any such medical or dental expenses are incurred.

There shall be two types of benefits payable under the Plan. These benefits are:

  1. Elective Plan Benefits which are defined as being those benefits paid with respect to preventive or non-life threatening medical services such as dental, vision, psychological, orthodontia and other elective procedures such as cosmetic surgery.
  2. Basic Plan Benefits which are defined under the Plan herein adopted as those benefits that are not elective plan benefits.

ARTICLE 2

COVERAGE

Coverage shall extend to the members and all qualified employees. Qualified employees shall include all of the employees of the Limited Liability Company with the exception of those employees who fall within any of the following excluded classes:

  1. Those employees who were less than eighteen (18) years of age at any time during the Plan year are not covered.
  2. Employees who are members of a union, employee association or other unit of employees covered by a collective bargaining agreement for which the benefits under the agreement are the subject of good faith bargaining are not covered by this Plan.
  3. Those employees having less than one (1) year of service for elective benefits are not covered. Such employees, however, must be covered by the Plan on the first day of the first month beginning after completion of such service.
  4. Those employees having less than six (6) months of service for basic benefits are not covered. Such employees, however, must be covered on the first day of the first month beginning after completion of such service.
  5. Those employees working less than 17½ hours per week are not covered.
  6. Those employees working less than six (6) months during the Plan year are not covered.
  7. Non-resident aliens who are employees are not covered if they receive no earned income within the meaning of IRC Section 911 (d) (2) from the Limited Liability Company. This income constitutes income from sources within the United States as defined by Section 861 (a) (3).

ARTICLE 3

NOTIFICATION OF COVERAGE

The Limited Liability Company intends for the payments of Plan benefits to comply with and be made in accordance with Sections 89 and 105(b) of the Internal Revenue Code. The Members are hereby directed to inform all current employees and new employees under employment of the Plan provisions. All questions concerning the administration and interpretation of the Plan shall be determined by the Members. Any questions concerning payments or reimbursements shall be asked of the Members.

**** end of partial view of this section ****

C. LIFE INSURANCE AGREEMENT

Common among small businesses is the use of key-life insurance. This is a life insurance policy on the key shareholders or members of a small business. The reason behind such insurance is quite sound. When a key person in any business dies, that business is bereft of the abilities of that person. Many small companies will fail when they lose their key personnel.

In most small companies only one or two people actually run the management details of the company. When this person is removed, the entire company changes. There was a small water disposal company in Los Angeles. The owner of the company was a highly respected and personable individual who doted on his customers. Upon his death, the company was inherited by his son. Unfortunately, the son lacked his father's tact or business acumen. Within a year of the father's death, the business was dead and had to be sold. If the company had key men insurance, it would have had a source of funds on which to draw while the business was being restructured.

Another reason for having such insurance is it can provide the funds necessary to purchase the LLC interest from a deceased member's estate. If the members had executed a buy-sell agreement, the LLC or individual members would need to come up with a sizable amount of cash to purchase a deceased member's share in the LLC. Insurance can provide that source of funds without having to borrow money or sell LLC assets.

The Internal Revenue Code specifically states in section 264 that the premiums paid for the life insurance on a key-person are not deductible where the payor of the premium (the LLC) is directly or indirectly the beneficiary of the policy. Since the proceeds of the insurance policy will be used to purchase the LLC interest of the deceased member, the LLC is thereby benefited. For that reason, the LLC is not permitted to deduct the insurance payments as ordinary and necessary business expenses.


MEMBERS' LIFE INSURANCE AGREEMENT

Agreement made this_____________ day ______________ by and between _____________________ __________________________________________________________________________________________________________________________________________________________________________________ being the Members of __________________________________________________ a Limited Liability Company created and existing under the laws of the State of ____________________with its principal place of business at ______________________________________________hereinafter titled the Limited Liability Company.

WHEREAS the parties hereto believe that the maintenance of harmonious management is in the best interest of the Limited Liability Company and the Members, and

WHEREAS it is the purpose of this Agreement to provide for key-man insurance on the lives of all of the Members so that the Limited Liability Company will be compensated for the loss of services upon the death of any Member,

NOW THEREFORE in pursuance of this purpose and in consideration of the mutual agreements and covenants contained herein it is hereby mutually agreed as follows:

ARTICLE 1

Life Insurance

Each member shall apply to ___________________________________________________for the issuance of the following life insurance policies for the following amounts:

Insured Amount _________________________________

The Limited Liability Company will be named as owner of the policies and the Limited Liability Company shall pay all of the premiums for the life insurance policies. Additional policies may be purchased upon agreement of the members.

ARTICLE 2

RIGHT OF INSURED TO ASSIGNMENT

If any member sells or transfers his interest in the Limited Liability Company, that former member may request assignment to him of the life insurance policy carried on his life. The life policy upon the life of said former member shall be assigned upon receipt by the Limited Liability Company of the cash value of the policy from the former member.

ARTICLE 3

TERMINATION OF AGREEMENT

This Agreement shall terminate upon the dissolution, receivership, insolvency or bankruptcy of the Limited Liability Company.

ARTICLE 4

PERSON BOUND BY THIS AGREEMENT

All provisions of this Medical Agreement shall be binding upon, inure to the benefit of and be enforceable by and against the respective heirs, administrators, personal representatives, executors, assigns and successors in interest of the Members.

ARTICLE 5

MISCELLANEOUS

5.A. SURVIVAL OF REPRESENTATIONS. The covenants, warranties, representations and other written statements set forth in this Agreement or in any exhibit hereto shall survive the execution and delivery hereof and formation of the Limited Liability Company. All of the same shall be deemed to be independently material and reliable by the party to whom made.


CHAPTER 14

TERMINATION OF A LIMITED LIABILITY COMPANY

The ending of a LLC is generally called its termination, although it is also sometimes called a "dissolution" or a "winding down" of the LLC. Whatever the name, it represents the process by which the members cease to operate as an LLC. When an LLC is terminated, all business activities cease except to the extent necessary to complete LLC business that was instituted prior to the termination. An LLC unlike a corporation does not have perpetual existence. It is a fundamental precept of an LLC that one day it will end. Many states have under their LLC act a statement that an LLC cannot last more than 30 years. The date of termination is required by all states that permit LLC's to be stated in the articles of organization.

Unless the operating agreement of an LLC states otherwise, an LLC will terminate automatically upon the death or bankruptcy of any member; some states require this to be stated in the articles of organization also. In addition, the operating agreement can state that when the purpose for which the LLC was formed has been accomplished, the company will terminate even though the termination date in the articles of organization has not yet arrived.

An LLC agreement is permitted to have clauses stating on what conditions the LLC will terminate. Some of the most common LLC termination clauses are triggered when:

  1. The LLC purpose is accomplished. Example: An LLC is formed to buy, refurbish and sell an apartment house and to terminate upon the sale.
  2. The stated termination date in the LLC agreement arrives.
  3. A member becomes insolvent or bankrupt. Unless the operating agreement states otherwise, when a member files for personal bankruptcy, the LLC is automatically terminated even though the business may itself be solvent.
  4. A member dies or becomes disabled and is unable to assist the LLC in its business, or a member withdraws from the LLC. Without a clause in the LLC's operating agreement stating otherwise the law is that an LLC terminates on the death of a member or upon a member's resignation.
  5. Any one of the following events occur. All states permit a court to order dissolution of an LLC for the following reasons regardless of specific clauses in the LLC agreement stating otherwise:

a. A member has been found insane by a court.

b. A member is incapable of performing his duties under the LLC agreement.

c. A member's conduct has prejudicially affected the ability of the LLC to carry on its business.

d. A member has repeatedly breached the LLC operating agreement.

e. The LLC can only do business at a loss.

f. Equitable reasons support the dissolution.

A lawsuit seeking termination on any of these grounds will be difficult and costly to prove. An alternative is for the LLC operating agreement to have an expulsion provision permitting expulsion of a member for any of the above reasons.

PROCEDURE

The termination of an LLC begins in one of two ways. The termination is instituted either by unanimous agreement of the members or by operation of law. An LLC is terminated by operation of law for one of two reasons:

  1. Its existence violates terms of the state's LLC law, such as being for an improper purpose, or more commonly,
  2. The terms of the LLC operating agreement call upon the LLC to be automatically terminated upon the happening of certain events such as described above.

Once the LLC has terminated, all business operations cease except to the extent necessary to complete outstanding business, pay LLC debts and fulfill outstanding LLC obligations. This process is generally called the winding down of the LLC. During the period of time for which an LLC is being wound down, each member remains liable for debts the LLC incurred during the "winding down" of LLC affairs in the same manner as when he was liable for LLC debts prior to the termination.

After the final cessation of business, the LLC will sell all of its assets and distribute the proceeds as follows:

  1. All federal and state taxes are paid.
  2. All employee wages and benefits are paid.
  3. All secured liabilities are paid.
  4. All unsecured liabilities are paid.
  5. Remaining funds are divided among the members based on their percentage of ownership interest in the LLC.

The proceeds received by a member in the dissolution of an LLC are a return of the member's investment. Any gain or loss in the dissolution is treated as a capital gain or loss. Example: A member paid $4,000 for his member interest and receives $3,000. The member has a $1,000 capital loss. Likewise, if the member receives $6,000, he has to recognize a $2,000 capital gain.

Depending on the complexity of the LLC's business, termination may be quick or it may be a long and involved process. Until the LLC is fully terminated, the individual liability of the members continues. If at the time of termination the LLC does not have enough assets to pay all of its debts and liabilities, the members must pay the remaining balance. Under state law, unless the operating agreement states otherwise, if the LLC is insolvent as are some of the members, the remaining solvent members must pay all of the outstanding debts and liabilities of the LLC.

After a dissolution an LLC is not required to pay interest on a member's share of proceeds under a dissolution except for a limited reasonable time after the date when repayment should have been made. In other words, if the LLC is late in making a distribution after the dissolution, it must pay interest for the time of the delay. The members can agree in the operating agreement not to have this provision apply. Likewise, the members may agree in the LLC operating agreement to have the LLC pay interest on a member's distributed share from the date the dissolution plan is adopted rather than the date the distribution could be made.

Once an LLC has been terminated, the members should publish a notice in the newspaper of the termination of the LLC. The members should also file a termination of the fictitious name statement. Both of these acts serve the important purpose of notifying the world of the termination of the LLC relationship. Under general agency law, if a member fails to inform a person of the termination of the LLC and that person, while reasonably believing the LLC to still be in effect, deals with a former member, the LLC relationship will still be found to exist. Publishing a notice of the termination of the LLC prevents such a third person from having a reasonable belief that the LLC is still in effect when dealing with a former member. Another reason for publishing the notice of termination of the LLC is so the creditors will be given notice to come forward and present their claims.

Following is a sample termination agreement for use when all of the members agree to terminate the LLC.


MEMBERS' TERMINATION AGREEMENT

Agreement made this ___________ day of ______________by and between ______________________ _____________________________________________________________________________________ _____________________________________________________________________________________being the Members of ________________________________ a Limited Liability Company created and existing under the laws of the State of __________________ with its principal place of business at hereinafter titled the Limited Liability Company.

WHEREAS it is the agreement of the parties that the Limited Liability Company as now in existence cannot and should not be continued in effect and should be terminated,

NOW THEREFORE in pursuance of this purpose and in consideration of the mutual agreements and covenants contained herein it is hereby mutually agreed as follows:

ARTICLE 1

TERMINATION OF LIMITED LIABILITY COMPANY

The Limited Liability Company as formed between the parties in accordance with the terms of the original Limited Liability Company operating agreement along with all subsequent amendments is by this agreement hereby terminated.

ARTICLE 2

DISCHARGE OF LIMITED LIABILITY COMPANY

All Limited Liability Company business operations will cease except to the extent necessary to complete outstanding business and the payment of the Limited Liability Company debts and fulfillment of outstanding Limited Liability Company obligations. The Limited Liability Company will sell all of its assets and distribute the proceeds in the following order:

  1. All federal and state taxes will be paid.
  2. All employee wages and benefits will be paid.
  3. All secured liabilities will be paid.
  4. All unsecured liabilities will be paid.
  5. Remaining funds are divided among the members based on their percentage of ownership interest in the Limited Liability Company.

ARTICLE 3

PERSON BOUND BY THIS AGREEMENT

All provisions of this Termination Agreement shall be binding upon, inure to the benefit of and be enforceable by and against the respective heirs, administrators, personal representatives, executors, assigns and successors in interest of the Members.

ARTICLE 4

MISCELLANEOUS

4.A. SURVIVAL OF REPRESENTATIONS. The covenants, warranties, representations and other written statements set forth in this Agreement or in any exhibit hereto shall survive the termination of the Limited Liability Company. All of the same shall be deemed to be independently material and the party to whom they were made deemed to have relied upon them.

**** end of sample view of chapter ****


APPENDIX

STATE LAWS

ALABAMA

CODE OF ALABAMA section 10-12-1

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The date of termination for the company if it has perpetual existence then so state,
  4. The name and address of the registered agent,
  5. Statement whether the company is to be managed by managers, if so, their names and addresses,
  6. If management is retained by members their names and addresses of the initial managers,
  7. The right, if any, to continue the business after the dissociation from it of a member.
  8. The right of the members to admit new members,
  9. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles by the organizer with the probate judge of the county where the company will have its principal place of business. The judge will forward a certified copy along with a check for $40.00 to the Secretary of State. Execution of the Articles constitutes an affirmation under penalty of perjury that the information in the Articles is true and correct.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company but the company will not be given effect until it has at least two members.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company" or the term "LLC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

There is a filing fee of $40.00 for the Secretary of State and a fee of $35.00 for the probate judge of the county where the company will have its principal place of business.

OPERATING AGREEMENT

The operating agreement may be either oral or written and may contain provisions not inconsistent with state law or the Articles of Organization. The operating agreement must be adopted with the unanimous consent of all members.

AMENDMENT

The Articles may be amended by an authorized manager or member or with the majority consent of all the members. The amendment must be filed in duplicate with the Probate Judge.

ALASKA

ALASKA STATUTE 10.50.075

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The termination date of the company, which cannot exceed 30 years,
  4. The name and address of the registered agent,
  5. Statement whether the company is to be managed by the members or by a group of managers and if so, the names and addresses of the initial managers,
  6. If management is reserved by the members, list names and addresses of members,
  7. The names and addresses of the organizers,
  8. A statement that the company will have at least two members upon formation, and
  9. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles with the Secretary of State. Execution of the Articles constitutes an affirmation under penalty of perjury that the information in the Articles is true and correct.

NUMBER OF MEMBERS

Two persons are necessary to form a limited liability company.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company" or the term "LLC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

There is a filing fee set by the Secretary of State. Call for amount.

OPERATING AGREEMENT

The operating agreement may be either oral or written and may contain provisions not inconsistent with state law or the Articles of Organization. The operating agreement must be adopted by the unanimous consent of all members.

AMENDMENT

The Articles may be amended by an authorized manager or member or by a majority consent of all members. The amendment must be filed in duplicate with the Secretary of State.

ARIZONA

ARIZONA REVISED STATUTES ANNOTATED

SECTIONS 29-601 through 29-857

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. A statement that the company has or will have more than two members upon formation,
  4. The termination date of the company,
  5. The name and address of the registered agent,
  6. Whether the company is to be managed by the members or by a group of managers and if so, the names and addresses of the initial managers,
  7. If management is reserved by the members, list names and addresses of members,
  8. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles by the organizer with the Secretary of State. The articles need not be acknowledged.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company. However, there must always be at least two members for the company to remain in effect.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company", "ltd. liability company" or "limited company" or the initials "LLC" or "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The fee for forming a limited liability company is $50.00.

OPERATING AGREEMENT

The operating agreement must be in writing and may contain provisions not inconsistent with state law or the Articles of Organization. The Operating Agreement may be amended by the managers if any otherwise by the members.

AMENDMENT

The Articles may be amended by filing an amendment signed and acknowledged by one or more managers, if the company is managed by managers or one or more members if managed by members. The amendment must be filed in duplicate with the Secretary of State.

ARKANSAS

STATUTES 4-32-101 through 4-32-1316

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The termination date of the company,
  4. The name and address of the registered agent,
  5. Whether the company is to be managed by the members or by a group of managers and if so, the names and addresses of the initial managers,
  6. If management is reserved by the members, list names and addresses of members, and
  7. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the articles by the organizer with the Secretary of State. The articles must be acknowledged.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company. However, there must always be at least two members for the company to remain in effect.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company," "ltd. liability company" or "limited company" or the initials "LLC" or "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The fee for forming a limited liability company is $50.00.

OPERATING AGREEMENT

The operating agreement can be either oral or written and may contain provisions not inconsistent with state law or the Articles of Organization. Power to amend the operating agreement is vested in the members.

AMENDMENT

The Articles may be amended by filing an amendment signed and acknowledged by the managers. Amendments must be approved by a vote of all of members. The amendment must be filed in duplicate with the Secretary of State.

CALIFORNIA

CALIFORNIA CORPORATIONS CODE

SECTIONS 17000 ET AL

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The termination date of the company, which may be perpetual,
  4. The name and address of the registered agent,
  5. Statement whether the company is to be managed by the members or by a group of managers,
  6. The names and addresses of the organizers, and
  7. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the articles by the organizer with the Secretary of State. Execution of the Articles constitutes an affirmation under penalty of perjury that the information in the Articles is true and correct. A Statement of Information must be filed within 90 days of the filing of the Articles. The filing fee for Statement of Information is $5.00.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company. However, there must always be at least two members for the company to remain in effect.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company" or the initials "LLC" or "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The fee is $80 plus another $800 as an annual minimum franchise fee.

OPERATING AGREEMENT

The operating agreement can be either oral or written and may contain provisions not inconsistent with state law or the Articles of Organization. The operating agreement must be adopted by the unanimous consent of all members.

AMENDMENT

The Articles may be amended by an authorized manager or member or by the majority consent of all members. The amendment must be filed in duplicate with the Secretary of State.

COLORADO

COLORADO REVISED STATUTES

7-80-101 through 7-80-913

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The termination date of the company,
  4. The name and address of the registered agent,
  5. The names and addresses of the initial managers, and
  6. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles with the Secretary of State. Execution of the Articles constitutes an affirmation under penalty of perjury that the information in the Articles is true and correct.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company, but it will not legally exist unless it has two or more actual members.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company", "ltd. liability company" or "limited company" or the terms "LLC" or "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The fee for forming a limited liability company are set pursuant to Colorado Revised Statute 24-21-104(3).

OPERATING AGREEMENT

The operating agreement must be in writing and may contain any provisions not inconsistent with state law or the Articles of Organization.

AMENDMENT

The Articles may be amended by the company's manager. The amendment must be filed in duplicate with the Secretary of State.

CONNECTICUT

CONNECTICUT PA-93-267 Section 42

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The date of termination for the company,
  4. The name and address of the registered agent,
  5. Statement whether the company is to be managed by managers, if so, their names and addresses,
  6. If management is retained by members their names and addresses of the initial managers,
  7. The right, if any, to continue the business after the dissociation from it of a member.
  8. The purpose of the company, and
  9. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles by the organizer with the Secretary of State. Execution of the Articles constitutes an affirmation under penalty of perjury that the information in the Articles is true and correct.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company but the company will not be given effect until it has at least two members.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company" or the terms "LLC"or "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

OPERATING AGREEMENT

The operating agreement may be either oral or written and may contain provisions not inconsistent with state law or the Articles of Organization. The operating agreement must be adopted with the unanimous consent of all members.

AMENDMENT

The Articles may be amended by an authorized manager or member or with the majority consent of all the members. The amendment must be filed in duplicate with the Secretary of State.

DELAWARE

DELAWARE CODE ANNOTATED

Title 18, Sections 101 through 107

CERTIFICATE OF FORMATION

The Certificate of Formation (Articles) must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The name and address of the registered agent,
  4. The names and addresses of the initial managers, and
  5. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles with the Secretary of State. Execution of the Articles constitutes an affirmation under penalty of perjury that the information in the Articles is true and correct. Verification or acknowledgement is not required.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company, but it will not legally exist unless it has two or more actual members.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company" or the term "LLC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The fee for forming a limited liability company is $50.00.

OPERATING AGREEMENT

The operating agreement must be in writing and may contain any provisions not inconsistent with state law or the Articles of Organization.

AMENDMENT

The Articles may be amended by filing an amendment signed and acknowledged by all the members. The amendment must be filed in duplicate with the Secretary of State.

DISTRICT OF COLUMBIA

DISTRICT OF COLUMBIA CODE ANNOTATED

SECTION 29-1301 ET SEQ.

CERTIFICATE OF FORMATION

The Articles of Organization must contain, at a minimum, the following information:

  1. The company name,
  2. The latest date on which the company will be dissolved,

2. The principal place of business,

3. The name and address of the registered agent,

4. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the duplicate Articles with the Mayor.

NUMBER OF MEMBERS

Two persons are necessary to form a limited liability company.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company" or the term "LLC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name. A professional limited liability company uses the abbreviation PLLC.

FEES FOR FORMATION

The fee for forming a limited liability company is $100.00.

OPERATING AGREEMENT

The operating agreement need not be in writing and may contain any provisions not inconsistent with state law or the Articles of Organization.

AMENDMENT

The Articles may be amended by filing an amendment signed and acknowledged by all the members. The amendment must be filed in duplicate with the Mayor.

FLORIDA

FLORIDA STATUTES SECTIONS 608.401 through 608.471

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The termination date of the company,
  4. The name and address of the registered agent,
  5. The total contributions made and agreed to be made,
  6. The right, if any , to admit new members,
  7. The right, if any, to continue the business after the dissociation from it of a member,
  8. Whether the company is to be managed by the members or by a group of managers and if so, the names and addresses of the initial managers,
  9. If management is reserved by the members, list names and addresses of members, and
  10. Such other provisions as the members wish to include in the articles.

A limited liability company is formed on the filing of the articles by the organizer with the Secretary of State. The articles must be acknowledged.

NUMBER OF MEMBERS

At least two persons are necessary to form a limited liability company. There must always be at least two members for the company to remain in effect.

NAME OF THE COMPANY

The name of the company must contain the words "limited company" or the term "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The fee for forming a limited liability company is $50 for a company with capital of less than $100,000 increasing to $250 for capital in excess of $1,000,000 (Section 608.452).

OPERATING AGREEMENT

The operating agreement must be in writing and may contain any provisions not inconsistent with state law or the Articles of Organization.

AMENDMENT

The Articles may be amended by filing an amendment signed and acknowledged by all of the members. The amendment must be filed in duplicate with the Secretary of State.

GEORGIA

STATUTES 14-11-100 through 14-11-1109

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The termination date of the company,
  4. The name and address of the registered agent,
  5. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles by the organizer with the Secretary of State. The articles must be acknowledged.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company. However, there must always be at least two members for the company to remain in effect.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company" or "limited company" or the terms "LLC" or "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The fee for forming a limited liability company is $75.00.

OPERATING AGREEMENT

The operating agreement can be either oral or written and may contain provisions not inconsistent with state law or the Articles of Organization. Power to amend the operating agreement is vested in the members.

AMENDMENT

The articles may be amended by filing an amendment signed and acknowledged by the managers. Amendments must be approved by a vote of all of members. The amendment must be filed in duplicate with the Secretary of State.

IDAHO

IDAHO LIMITED LIABILITY ACT, TITLE 53, CHAPTER 6

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The termination date of the company, which may be perpetual,
  4. The name and address of the registered agent,
  5. Whether the company is to be managed by the members or by a group of managers and if so, the names and addresses of the initial managers,
  6. If management is reserved by the members, list names and addresses of members,
  7. The names and addresses of the organizers, and
  8. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles by the organizer with the Secretary of State. Execution of the Articles constitutes an affirmation under penalty of perjury that the information in the Articles is true and correct.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company. However, there must always be at least two members for the company to remain in effect.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company" or the terms "LLC" or "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The fee for forming a limited liability company is $100.00.

OPERATING AGREEMENT

The operating agreement can be either oral or written and may contain provisions not inconsistent with state law or the Articles of Organization. The operating agreement must be adopted by the unanimous consent of all members.

AMENDMENT

The Articles may be amended by an authorized manager or member or by the majority consent of all members. The amendment must be filed in duplicate with the Secretary of State.

ILLINOIS

ILLINOIS LEGISLATIVE SERVICE

CH 805 180 SECTIONS 1-1 to 55-10

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The termination date of the company,
  4. The name and address of the registered agent,
  5. The total contributions made and agreed to be made,
  6. The right, if any, to admit new members,
  7. The right, if any, to continue the business after the dissociation from it of a member,
  8. Whether the company is to be managed by the members or by a group of managers and if so, the names and addresses of the initial managers,
  9. If management is reserved by the members, list names and addresses of members,
  10. Occurrences agreed to by members which will terminate the company,
  11. Name and address of each organizer,
  12. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles by the organizer with the Secretary of State. The articles need not be acknowledged.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company. However, there must always be at least two members for the company to remain in effect.

NAME OF THE COMPANY

The name of the company must contain the words "limited company" or the term "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The fee for forming a limited liability company is $500.00.

OPERATING AGREEMENT

The operating agreement can be oral or written and may contain provisions not inconsistent with state law or the Articles of Organization. Power to amend operating agreement vested in members unless Articles vest the power in the managers.

AMENDMENT

The Articles may be amended by filing an amendment signed and acknowledged by the managers. Amendments must be voted approved by 2/3's of the managers unless the Articles specify another number. The amendment must be filed in duplicate with the Secretary of State.

INDIANA

INDIANA STATUTES ANNOTATED sections 23-18-1-1

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The date of termination of the company if it does not have a perpetual existence,
  4. The name and address of the registered agent,
  5. Statement whether the company is to be managed by managers, if so, their names and addresses, and
  6. If management is retained by members, their names and addresses, and
  7. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles by the organizer with the Secretary of State. Execution of the Articles constitutes an affirmation under penalty of perjury that the information in the Articles is true and correct.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company but the company will not be given effect until it has at least two members.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company" or the terms "LLC" or "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The filing fee for the Articles of Organization is $90.00.

OPERATING AGREEMENT

The operating agreement may be either oral or written and may contain provisions not inconsistent with state law or the Articles of Organization. The operating agreement must be adopted with the unanimous consent of all members.

AMENDMENT

The Articles may be amended by an authorized manager or member or with the majority consent of all the members. The amendment must be filed in duplicate with the Secretary of State.

IOWA

IOWA CODE SECTIONS 490A.100 through 490A.1601

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The termination date of the company,
  4. The name and address of the registered agent,
  5. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles by the organizer with the Secretary of State. Execution of the Articles constitutes an affirmation under penalty of perjury that the information in the Articles is true and correct.

NUMBER OF MEMBERS

Only one person is necessary to form a limited liability company, but it will not legally exist unless it has two or more actual members.

NAME OF THE COMPANY

The name of the company must contain the words "limited liability company", "ltd. liability company" or the term "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name. If the company uses a fictitious name it must file a certified copy of a members' resolution adopting the name.

FEES FOR FORMATION

The fee for forming a limited liability company is $50.00.

OPERATING AGREEMENT

The operating agreement must be in writing and may contain provisions not inconsistent with state law or the Articles of Organization.

AMENDMENT

The Articles may be amended by the company's manager. The amendment must be filed in duplicate with the Secretary of State.

KANSAS

KANSAS STATUTES ANNOTATED

SECTIONS 17-7601 through 17-7652

ARTICLES OF ORGANIZATION

The Articles must contain, as a minimum, the following information:

  1. The company name,
  2. The principal place of business,
  3. The termination date of the company,
  4. The name and address of the registered agent,
  5. The right, if any, to admit new members,
  6. The right, if any, to continue the business after the dissociation from it of a member,
  7. Whether the company is to be managed by the members or by a group of managers and if so, the names and addresses of the initial managers,
  8. If management is reserved by the members, list names and addresses of members, and
  9. Such other provisions as the members wish to include in the Articles.

A limited liability company is formed on the filing of the Articles by the organizer with the Secretary of State. The articles are not required to be acknowledged.

NUMBER OF MEMBERS

At least two persons are necessary to form a limited liability company. There must always be at least two members for the company to remain in effect.

NAME OF THE COMPANY

The name of the company must contain the words "limited company" or the term "LC." The name of the company may not be deceptively similar to that of another limited liability company or any registered name.

FEES FOR FORMATION

The fee for forming a limited liability company is $150.00

OPERATING AGREEMENT

The operating agreement must be in writing and may contain any provisions not inconsistent with state law or the Articles of Organization. The operating agreement must state the location and time of the annual meeting of members and managers.

AMENDMENT

The Articles may be amended by filing an amendment signed and acknowledged by all of the members. The amendment must be filed in duplicate with the Secretary of State.


LIMITED LIABILITY COMPANY

INDEX

AFTERWARDS 306

Annual Statement 304

Employer identification number 309

Estimated tax 310

Fictitious name filing 314

Personal property taxes 311Sales and Use taxes 311

State and business licenses 305,306,310

Unemployment Insurance 314

Unemployment tax 313

Workers Compensation 314

Withholding 312

ARTICLES OF ORGANIZATION 35,53,160

Agent for Service 170

Basic articles for GEORGIA, IOWA, MARYLAND,

OKLAHOMA, VIRGINIA, and WEST VIRGINIA 178

Basic articles for ALASKA, ARIZONA, ARKANSAS,

COLORADO, DISTRICT OF COLUMBIA,INDIANA, KENTUCKY, MAINE,

MICHIGAN, MONTANA, NEW MEXICO,

N. CAROLINA, OHIO, OREGON, TEXAS and UTAH 183

Basic Articles for FLORIDA, NEBRASKA,

SOUTH DAKOTA, WYOMING 193

Basic Articles for DELAWARE, LOUISIANA, MASSACHUSETTS, MISSISSIPPI, NEW HAMPSHIRE, NEW JERSEY, PENNSYLVANIA,

RHODE ISLAND and WASHINGTON 207

Basic Articles for ALABAMA, CONNECTICUT,

ILLINOIS, KANSAS, MINNESOTA, MISSOURI,

NEVADA, NORTH DAKOTA and WISCONSIN 247

Basic Articles for NEW YORK 263

Basic Articles for TENNESSEE 268

Basic Articles for CALIFORNIA and IDAHO 274

CONTENTS

NAME 163

NUMBER OF MEMBERS 164

ORGANIZERS 162

PURPOSE 159

TERM 160

WHERE TO FILE 161

BULK SALES 114

CAPITAL CONTRIBUTIONS 101,102

Amount 101

Form 104

Share in profits and losses 101

COMMON QUESTIONS 4

Alter-Ego 15Annual Statement 30

Articles of Organization 8

Amendment 31

Bulk Sale 21

Definition 4Differences from corporations and partnerships 15

Taxation 16,17Dissolution 22

Proceeds 23

Formation 6,12

Cost 14

Limited Liability 13

Members 8,9

Duties 11

Managers 10

Meetings 8

Membership Certificates 12,25

Name 6,51

Fictitious Name 31

Operating Agreements 26

Registered Agent and Office 7,59

Security Registration 24,25

State licenses 27

Taxation 18

Accumulated earnings credit 20

Estimated tax 30

Liability of Members 24

Personal Property Tax 27

Property 18

Sales and Use Tax 27

DEBTS OF PRIOR BUSINESS 50

DEFINITION 32

DISSOLUTION 51,341

Procedure 338

Termination Agreement 349

DISTRIBUTION 105

Form and Share 105

Wrongful 106

FILING FEES 61

FORMATION36,56

LAWSUITS61

LIMITED LIABILITY 93

Alter-Ego 96

In states not having limited liability companies 98

Liability imposed by law 94

MEMBERS42,317

Agreements 317

Buy-Sell 317,319

Life Insurance 319,321

Medical Reimbursement Plan 334,336

Membership Certificates 45

NAME 58

OPERATING AGREEMENT 40,63,275

Adoption 276

Construction 278

Definition 275

Location 279

Waiver 279

OTHER STATES 108

Foreign limited liability companies 108

States not having limited liability companies 110

REGISTERED AGENT AND OFFICE 59

SECURITY LAWS 46,121

Federal Exemption 121

Intra-state 121

Regulation D 122

State Exemption 125

Subscription Agreement 141

TAXATION48,65

As either corporation or partnership 65

As partnership 76

Basis for property 88

Capital gains and losses 86

Casualty Losses 90

Debt cancellation 85

Depreciation 83

Like-Kind Exchange 89

Membership interest 80

Not for profit activities 85

Passive activity losses 82

Rental Income 81

State Taxation 92

Test for treatment 69

Theft losses 91

Treatment of property 78