As more people pursue entrepreneurship, they must decide how their business will be formed. The internet has made limited liability companies so popular that many new business owners choose this option without exploring other options or knowing why a limited liability company may be their best choice. If you are considering forming your business as a limited liability company, here are a few terms you should know. We promise there won’t be a vocabulary test at the end. Not by us, anyway.
Limited Liability Company
So, you’re considering a limited liability company, but why? A limited liability company, also known as LLC, is a business entity created at the state level to limit its member’s business liability to the business’s assets. Protecting the member’s personal assets in the process. It does not prevent lawsuits, it does not offer trademark protection, and filing the paperwork does not guarantee absolute security.
A Company Agreement, also known as an Operating Agreement, is an internal agreement between LLC members that dictates how decisions will be made regarding the company. This agreement is essential when there are multiple members to ensure all members are on the same page and to have policies in place in case of future conflict. It is just as vital, if not more, when only one LLC member exists. Having a well–written Company Agreement in place as a single–member LLC can help maintain your limited liability status if it is challenged during a lawsuit.
By now, you’re probably wondering what or who an LLC member is. Owners of an LLC are referred to as members, not owners. Members can be individuals, corporations, or other limited liability companies.
An LLC is formed by preparing Articles of Organization and filing them with the Secretary of State’s office. The organizer is the individual or entity that prepares the Articles of Organizations and files them. The organizer doesn’t have to be a member of the LLC. After the LLC is formed, the organizer can prepare a statement removing themselves as the organizer and assigning ownership of the LLC to the members.
When forming an LLC, you must designate a registered agent. The challenge is that many people don’t know what a registered agent is. A registered agent is an individual or company responsible for receiving official documents for your business. These could be legal papers or papers from the state. Registered agents must be in the state and have a physical address, not a P.O box or virtual address.
Manager vs. Member Managed
When forming your LLC, you must decide who will manage the company’s day-to-day operations. The members or a manager. Day-to-day operations look like entering into contractual relationships, opening bank accounts, overseeing operations, business building, finances, etc. All members have an equal say in these decisions in a member-managed LLC. In a manager-managed LLC, members will elect one or more members or non-members to make these decisions. A manager-managed LLC allows the company to have passive investors. Owners who have no say in how the business is run but benefit from the distribution of the company’s profits.
Choosing the proper business formation is not a decision to be taken lightly. If you decide to form a limited liability company, it is essential to know the terminology associated with the business entity.