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It’s no secret that limited liability companies (LLCs) are a very popular form of entity. I’ve noticed, however, that many people misunderstand the documents necessary when forming an LLC. So, what documents are necessary? Well, the lawyer answer is of course that it depends on the purpose of the entity and whether it is going to be a Single-Member LLC or a Multi-Member LLC. One document is absolutely necessary: Articles of Organization. Colorado (and I believe all other states) requires a business to file Articles of Organization with the Secretary of State to form an LLC. However, this is usually a bare bones document that provides for the name of the LLC, principal business address, name and address of the registered agent, whether the LLC is manager-managed or member-managed, and the name of the person causing the articles of organization to be filed with the secretary of state. Besides the Articles of Organization, the other documents that an LLC should have will vary. This post provides a few general ideas about documents that you may need when forming either a Single Member LLC or a Multi-Member LLC. Single Member LLCs Initially, as mentioned above, a single member LLC (“SMLLC”) will need to file articles of organization to create the entity under state law. Many attorneys will recommend that the Articles of Organization is the only document that the SMLLC needs. If a SMLLC is on a shoestring budget, then I think just the Articles of Organization will work, provided the company follows business formalities, such as having a business bank account and keeping business assets and liabilities separate from personal assets and liabilities. To make the importance of following business formalities more real for the business owner, I typically recommend that the SMLLC have an operating agreement that addresses governance policies, succession, death and disability. By following the written policies in an operating agreement, I believe the business owner will have a better argument that the liability protections available to LLCs should be upheld if challenged in court. Multi-Member LLCs When an LLC has more than one member, it is essential to have a written operating agreement to memorialize the agreement between the parties. The operating agreement should address the rules and policies that govern the entity, including topics such as management/decision making, voting rights, distributions, allocations, employment, sale of interests, tax issues, liquidation, dispute resolution, death and disability and many others. An operating agreement may be sufficient for most LLCs. However, the members of an LLC may also want any or all of the following agreements: Buy-Sell Agreement – the purpose of a buy-sell agreement is to ensure continuity of ownership and prevent unwanted parties from becoming owners. Non-Compete Agreement – this agreement prohibits the owners from leaving and starting a competing business for a period of time that must be reasonable in time and geographic scope. Confidentiality Agreement – this agreement may be incorporated in the operating agreement or in a separate agreement. It basically states that all of the company’s proprietary information, such as customer lists etc. will be kept confidential. Intellectual Property Agreement – if the company has important intellectual property to protect, it should have agreements with employees and contractors that make it clear that the company owns any IP created for or used in the business. Employment Contracts – as the company grows and gets more employees and management personnel it may need agreements governing the terms of their employment. Bottom Line: the documents necessary when forming an LLC will vary depending on the LLC’s business and these documents become more important and greater in number if it’s a Multi-Member LLC.
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Business Law, LLCs, Startups, Forming an LLC,
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