The LLC Formation Module includes the documents and options needed to create either a member-managed or a manager-managed limited liability company (LLC) for a client. All documents can be assembled through a single interview that batch assembles the required documents without requiring the attorney to complete separate interviews for each document.

LLC Operating Agreement

The LLC Operating Agreement is the document used to govern the internal affairs of the LLC (sometimes called a Company Agreement or a similar term). The LLC Operating Agreement deals with the control of the LLC and decision-making, distributions of LLC funds to members, the rights and obligations of LLC members, the tax classification of the LLC and other tax matters, and various other provisions needed to properly form an LLC. Each of these topics is discussed in more detail below.

Control and Decision-Making (Management)

The LLC Operating Agreement allows the members to determine control of the LLC, including who is entitled to make decisions on behalf of the LLC and the manner for doing so. The LLC Operating Agreement specifies:

• The management structure for the LLC, including whether the LLC will be member-managed or manager-managed;
• Whether the managers of the LLC must also be members;
• Whether the LLC should reimburse the managers for expenses incurred on behalf of the LLC without prior approval;
• How managers make decisions on behalf of the company (for example, by majority vote or by unanimous vote);
• Any restrictions on the members’ ability to remove a manager;
• Whether a manager’s bankruptcy should trigger a removal;
• Whether the manager has the right to vote on an amendment to the organizational documents of the LLC;
• Whether the LLC has the ability to appoint officers, such as a CEO or President;
• If the LLC has the ability to appoint officers, whether any officers must also be members of the LLC; and
• If the LLC has the ability to appoint officers, whether to name them in the documents or leave them to be appointed at a later time.

Distributions of LLC Funds to Members

Unless the LLC Operating Agreement specifies how LLC profits are distributed, the members must rely on inflexible provisions of state law that often do not match their intent. The LLC Operating Agreement specifies:

• Whether distributions are discretionary or mandatory (whether the LLC must distribute funds to the members);
• The percentage interest of each member in the LLC (for purposes of determining what percentage of LLC income each member should receive);
• If distributions are mandatory, the frequency of required distributions;
• Whether the LLC must make “tax distributions” to help members offset phantom income from the LLC; and
• If the LLC must make tax distributions, the frequency of the distribution and the method of calculating the distribution.

Rights and Obligations of LLC Members

The LLC Operating Agreement provides details about the rights and obligations of the LLC members. It specifies:

• The ownership structure for the LLC entity, including the total number of members, each member’s contribution to the capital of the LLC, and the percentage interests held by each member;
• Whether the LLC is authorized to divide membership interests into voting and non-voting interests and, if so, which members hold voting interests and which members hold non-voting interests;
• Whether non-voting members are entitled to notice of meetings of the voting members;
• Whether the interests in the LLC are subject to transfer restrictions to enhance asset protection and tax-saving opportunities and prevent members from being forced to share decision-making authority with unanticipated parties;
• If the LLC is manager-managed, whether the transfer of membership interests requires manager approval;
• Whether the LLC has permitted transfers—such as transfers to family members or affiliates—that may be made without prior authorization;
• If transfers to family members are permitted, how to define “family” in a way that meets the member’s goals (for example, whether spouses or adopted children should be included);
• If the state LLC act permits the elimination of fiduciary duties, whether the LLC members or managers should be subject to fiduciary duties (including the fiduciary duty of loyalty, which can cause problems for members involved in multiple businesses);
• If the state LLC act does not permit the elimination of fiduciary duties but permits modification, how and whether to modify fiduciary duties to meet the member’s goals;
• Whether the LLC should indemnify members or managers for actions taken in compliance with fiduciary duties;
• Whether special approval of the members or managers is required for acts that fundamentally affect the business, including:
• Calling a meeting of the members;
• Amending the formation document and LLC Operating Agreement of the LLC;
• Issuing new membership interests in the LLC;
• Incurring debt on behalf of the LLC;
• Admitting new members to the LLC following a transfer of membership interest in accordance with the LLC Operating Agreement;
• Making investments from LLC funds;
• Acquiring significant assets outside of the ordinary course of LLC business;
• Distributing property other than cash (in-kind distributions) to one or more members;
• Settling a lawsuit on behalf of the LLC;
• Making a decision to wind up the LLC or declare bankruptcy;
• Voting to reinstate the LLC after it has been dissolved or terminated;
• Making decisions about the LLC’s tax classification that could affect the members;
• Removing and replacing a manager of the LLC; and
• Ratifying a transaction that would otherwise violate the duty of loyalty;
• If some actions require supermajority approval of the members, defining what percentage of membership interests constitutes a supermajority;
• Whether the non-voting members may vote on special approvals; and
• Whether to require a spousal consent to plan for spousal community property interests in the LLC and, if so, the form of the spousal consent.

Tax Classification of the LLC and Related Tax Matters

The LLC Operating Agreement specifies:

• How the LLC will be classified for tax purposes, including the default tax classification and the option or requirement to elect to be taxed as a subchapter S corporation;
• If the LLC is a multi-member LLC taxed as a partnership, tax provisions designed to comply with the safe harbor provisions of the Treasury Regulations governing entities taxed as partnerships;
• If the LLC is taxed as an S corporation, transfer restrictions and other provisions to help ensure that the entity continues to qualify for taxation under subchapter S of the Internal Revenue Code;
• If the LLC is owned by a married couple in a community property state that will hold their interests as community property, whether the married couple should be treated as a disregarded entity for tax purposes;
• Identification of the tax matters representative (partnership representative) for the LLC;
• Definition of the tax matters representative’s authority to bind the LLC in IRS audit proceedings;
• Whether the tax matters representative must also be a member of the LLC;
• Whether the tax matters representative must opt-out of partnership-level tax liability for IRS audits; and
• Whether the LLC must indemnify the tax matters representative for acts taken in good faith and without gross negligence or willful misconduct.

Miscellaneous Provisions

The LLC Operating Agreement deals with several other miscellaneous issues, including:

• Whether any other agreements between the parties should be excluded from the merger clause and be considered as part of the same fundamental business transaction between the parties;
• Organization of the LLC, including the purpose, powers, and term of the LLC; the LLC’s ownership of company property, and the limitation of member liability in connection with the operation of the LLC;
• The relationship of the LLC Operating Agreement to the state LLC act and the means of resolving inconsistencies between the LLC Operating Agreement and the state LLC act;
• The process that members or managers use for taking action on behalf of the LLC;
• The procedures for meetings, including calling the meeting, providing notice of the meeting, the manner of voting, remote participation, and quorum and attendance requirements;
• Procedures for resignation and removal of managers; and
• Procedures for winding up and termination of the LLC, including liquidation and distribution of assets.

LLC Formation Document

The LLC Formation Document is the document used to form an LLC with the Secretary of State or equivalent state agency (often called Articles of Organization, Certificate of Formation, or similar names). If the Secretary of State publishes a PDF of the LLC Formation Document and allows it to be filed manually (as opposed to requiring e-filing, which is the current trend), a partially complete copy of the state-provided PDF of the LLC Formation Document is provided with the other documents in the assembly.

LLC Organizational Resolution

The LLC Organizational Resolution allows the members to approve or ratify the LLC formation and agree to such matters as opening bank accounts and related issues.

EIN/SS-4 Application

A pro forma Form SS-4 to allow the LLC organizer to apply for and receive an employer identification number (EIN) for the LLC, together with a client authorization to e-file the Form SS-4 as required for IRS purposes.

LLC Operations Guide

The LLC Operations Guide—which may be called by a different name provides new LLC members with the information needed to effectively own and operate the LLC for business purposes. It explains the LLC formation—including tax classification and related considerations—in plain English and provides instructions for effectively maintaining liability protection through the LLC.

Interview Options

The following interview options allow all LLC formation documents described above to be assembled through a single interview that collects the following information:

• The name, formation state, and (optional) formation date of the LLC and, if a client will be completing the intake interview, the alternate names in case the first choice of name is unavailable;
• For each member of the LLC:
  • The name, address, and type of member (individual, organization, or trust);
  • The member’s email address (for e-sign purposes);
  • Each member’s capital contribution; and
  • If the LLC Operating Agreement creates voting and non-voting interests, whether each member’s membership interest is voting or non-voting.
• Whether the LLC will be member-managed or manager-managed;
• If the LLC is manager-managed and the managers differ from the members, then, for each manager of the LLC, the name and address of the manager (If the LLC is manager managed and all members are managers, the manager information is not collected separately in the interview and is populated behind the scenes based on the member information.);
• Whether the LLC will be formed for a general or specific purpose and, if for a specific purpose, a statement of the purpose for which the LLC is formed;
• If the LLC is owned by multiple members, whether the members will have equal or unequal interests;
• Whether the LLC will be owned by two members that are married to each other and that reside in a community property state (to deal with the putative ownership by a spouse that is not listed on the LLC);
• If the LLC has voting and non-voting interests, whether non-voting members must be provided with notices of meetings of the members;
• Whether the LLC will have voting and non-voting interests;
• The designation of registered agent, including the name and address required to be included in the formation document and whether the registered agent is an individual or organization;
• The tax classification of the LLC, with options being the default tax classification (disregarded entity for single-member LLC or partnership for multi-member LLC, S corporation, or provisions to allow LLC to be classified under the default tax classification unless an S corporation election is later filed);
• The treatment of the LLC for tax purposes if the LLC is owned by spouses in community property states;
• If the LLC is taxed as a partnership:
  • The designation of the tax matters representative;
  • The authority of the tax matters representative;
  • Whether the tax matters representative must be a member;
  • Whether to require the tax matters representative to opt out of partnership-level liability for audits; and
  • Whether to indemnify the tax matters representative for acts taken in good faith and without gross negligence or willful misconduct.
• Whether a new employer identification number need be obtained and, if so, the information required to complete the Form SS-4 on the client’s behalf;
• Whether to restrict a member’s ability to transfer a membership interest and, if so, the conditions of the restriction (including whether to permit transfers to family members and how “family” should be defined for purposes of the restriction);
• For manager-managed LLCs, whether manager approval is required for transfers of LLC interests;
• Depending on what is allowed by state law (and explained in the interview), whether to waive or customize the default fiduciary duties imposed by the state LLC statute, whether to allow ratification of a conflicted transaction, and whether to include indemnity and exculpation provisions relating to fiduciary duties;
• For member-managed LLCs, whether a special vote is required, and for manager-managed LLCs, whether manager consent is required, to:
  • Call a special meeting of the members;
  • Amend the LLC’s formation and organizational documents;
  • Issue new membership interests in the LLC;
  • Incur debt on behalf of the LLC;
  • Approve a transfer of membership interests;
  • Make investments on behalf of the LLC;
  • Acquire assets on behalf of the LLC;
  • Dispose of the LLC’s assets;
  • Distribute company property (other than cash) to a member;
  • Settle lawsuits on behalf of the LLC;
  • Wind up the LLC or declare bankruptcy;
  • Reinstate the LLC if it has been dissolved;
  • Make decisions about the tax classification of the LLC or other tax-related decisions;
  • Remove and/or replace a manager; and
  • Ratify a transaction that would otherwise violate the duty of loyalty.
• Define the percentage of membership interests will constitute a supermajority for purposes of special approvals;
• Identify a threshold below which the LLC may incur debt (either by reference to a single transaction or aggregate transactions);
• Identify a threshold below which the LLC may make investments;
• Specify approvals required for dispositions of assets;
• If the LLC has voting and non-voting interests, specify whether non-voting members should be allowed to vote on special approvals;
• Specify whether a manager should be reimbursed for reasonable expenses incurred on behalf of the LLC;
• Specify what approval by managers is required to constitute an act of the LLC;
• Specify whether each manager must also be a member;
• Include provisions restricting the members’ ability to remove a manager;
• Specify whether the members may remove a manager for bankruptcy;
• Require manager approval to amend governing documents;
• Include provisions for appointment of officers, including whether each offers must be a member and whether to name specific officers in the documents;
• Define whether LLC distributions are mandatory or discretionary and, if mandatory, the frequency of the distributions;
• Decide whether to require the LLC to make distributions to cover each member’s tax liability for the LLC’s income (phantom income provisions) and, if so, the frequency of the distributions and the manner of determining the assumed tax rate;
• Determine whether to include spousal consent provisions to deal with spousal interests in a married member’s interest in the LLC;
• Specify whether the LLC formation will take effect on filing or have a delayed effective date; and
• Specify whether there are any outside agreements that should be considered part of the same overall agreement between the parties to the LLC Operating Agreement (for purposes of the merger clause);

State-Specific Considerations

State-specific considerations are built into the product at a technical level. They control the options presented to the attorney in the assembly process, the help text and guidance provided, and the language that appears in the final assembled documents. For this module, a product is state-specific if it addresses each of the following questions.

Statutory References

• Enter the title (preferred) or a citation to the state statute that governs business entities in general.
• Enter the citation to the state act that applies specifically to an LLC.
• Does the state act include a short title?
• Enter the short title.
• Does state law specifically authorize action by resolution without a meeting for this entity type?
• Enter the citation for the section of state law that authorizes action by resolution without the necessity of a meeting.
• Enter the title to use for resolutions in lieu of a meeting.

Formation Document (Articles of Organization, Certificate of Formation, etc.)

• What is the title of the document that is filed with the state to form an LLC under state law?
• Does the state LLC act specifically define the term for the formation document?
• What is the statutory citation for the definition of the formation document?
• What is the filing fee for the formation document?
• Who can serve as an organizer for purposes of signing the formation document?
• May the formation document be e-signed?
• May the formation document be e-filed?
• Is publication required in connection with formation?
• Describe the publication requirement

Organizational Document (Operating Agreement)

• What is the title of the document that governs the internal affairs and operations of the LLC under state law?
• Does the state LLC act specifically define the term for the organizational document?
• What is the statutory citation for the definition of the organizational document?
• Does the state LLC act identify provisions that cannot be altered or waived by the operating agreement?

Owner References

• What term does the state LLC act use for an owner of the LLC?
• Does the state LLC act specifically define the term for an owner of the LLC?
• What is the statutory citation for the definition of an owner under the state LLC act?

Manager References

• What term does the state LLC act use for a manager of the LLC?
• Does the state LLC act specifically define the term for a manager of the LLC?
• What is the statutory citation for the definition of a manager under the state LLC act?

Agent for Service of Process

• Does state law require the Secretary of State or other state agency to act as agent for all LLCs in the state?
• What term does state law use to refer to the agent appointed to receive service of process on behalf of a business entity?
• Does state law require signed acceptance by the registered agent?
• What is the title of the document that the registered agent must sign to accept appointment?

Equity Classification and References

• Does the state LLC act make a distinction between economic and non-economic interests?
• What term does the state LLC act use for an owner’s equity in the LLC?
• Does the state LLC act specifically define the term for an owner’s equity in the LLC?
• What is the statutory citation for the provision of the state LLC act that defines an owner’s total interest in the entity?
• Does the state LLC act specifically define the term for an economic interest?
• What term does the state LLC act use for an economic interest?
• What is the statutory citation for the provision of the state LLC act that defines an economic interest?
• Does the state LLC act specifically define the term for a non-economic interest?
• What term does the state LLC act use for a non-economic interest?
• What is the statutory citation for the provision of the state LLC act that defines a non-economic interest?

Assignees/Transferees

• Does the state LLC act specifically define the term for an assignee?
• What term does the state LLC act use for an assignee?
• What is the statutory citation for the provision of the state LLC act that defines an assignee?

Winding Up and Dissolution

• Enter the citation for the section of state law that requires mandatory winding up.
• Enter the citation for the section of state law that states the grounds for judicial dissolution.

Creditors’ Rights

• Does the state LLC act require notice to creditors on liquidation?
• Enter the citation for the state law that requires the LLC to send notice of liquidation or dissolution to each creditor or potential claimant against the state LLC.
• Enter the title of the document filed with the state to dissolve (or evidence dissolution of) the LLC.
• Enter the text of the charging order statute:
• Enter the citation for the state charging order statute.
• Is a charging order the exclusive remedy for creditors of a member?

Fiduciary Duties

• Does the applicable state LLC act include default fiduciary duties on members or managers?
• Does the applicable state LLC act include an explicit duty of care?
• Does the applicable state LLC act include an explicit duty of loyalty?
• Is the duty of care limited to that defined in the state LLC act?
• Enter the citation to the state LLC statute that describes the duty of care.
• Describe the duty of care using the language from the state LLC act.
• Does the state LLC act allow the operating agreement to completely eliminate the duty of care?
• Does the state LLC act allow the operating agreement to modify the duty of care?
• Enter the citation to the state LLC statute that describes the duty of loyalty.
• Describe the duty of loyalty using the language from the state LLC act.
• Does the state LLC act allow the operating agreement to completely eliminate the duty of loyalty?
• Does the state LLC act allow the operating agreement to modify the duty of loyalty?
• Does the state LLC act allow all of the members of a member-managed LLC or managers of a manager-managed LLC to authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty (ratify)?
• Does the state LLC act allow the operating agreement to identify specific types or categories of activities that do not violate the duty of loyalty?
• Does the state LLC act restrict the circumstances under which the LLC may indemnify a member or manager?
• Enter the citation for the indemnity restriction.

Voluntary Dissociation or Withdrawal

• Do the default provisions of the state LLC act permit voluntary withdrawal?
• Does the state LLC act allow the Operating Agreement to prohibit withdrawal while the member still retains an interest?
• Does the state LLC act permit wrongful withdrawal (withdrawal prohibited by the Operating Agreement)?
• Penalties for wrongful withdrawal:
• Citation for the provision that imposes a penalty for wrongful withdrawal.
• Do the default provisions of the state LLC act require the LLC to redeem a voluntarily withdrawing member’s interest?
• May the operating agreement waive the redemption right?

Involuntary Withdrawal (Expulsion)

• Do the default provisions of the state LLC act permit an involuntary dissociation/expulsion of an LLC member?
• What statute authorizes expulsion?
• May the operating agreement prohibit involuntary dissociation/expulsion?
• May the operating agreement allow involuntary dissociation/expulsion?

Series LLCs

• Does state law recognize series LLCs?
• What statute authorizes series LLCs?

Periodic Registration Requirements

• Does this state require the filing of a periodic report or registration with a state agency?
• What is the title of the periodic report?
• At what interval must the report be filed?
• What is the fee for filing the periodic report?