LLC Management - Part 1: Setting Up Your LLC

Welcome to the first of three articles in our series called, “Getting on the Path to ‘Best Practices’ for LLC Management.”

Many of our clients approach us with questions about managing their existing limited liability companies (“LLCs”) or forming new LLCs to manage their ongoing affairs.  This series of blog posts will address the basics of handling these entities in three parts – Setting Up Your LLC, LLCs and Finances, and LLCs and Recordkeeping.

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Part 1: Setting Up Your LLC

The first steps of forming a limited liability company (or “LLC”) are relatively straightforward – you must file simple organizational paperwork with the State Corporation Commission.  This paperwork, called “Articles of Organization,” identifies (i) the name of the company, (ii) the purpose of the company, (iii) the identity and address of the company’s “registered agent,” and (iv) the address of the company’s principal office. When choosing a name for your company, keep in mind that there are two main features that are required for every LLC’s name.  First, it must be “distinguishable,” meaning that it is not identical or prohibitively similar to the name of an existing LLC.  The name must also include words or abbreviations that identify the company as an LLC, such as “limited company,” “limited liability company,” “L.C.,” “LC,” “L.L.C.,” or “LLC.”  Having a distinguishable name for purposes of forming the company is a separate issue from potentially infringing on another company’s name (say in a different state) for purposes of trademarks.  This takes a more exhaustive search and may be advisable depending on the name and where you will conduct business.

Today, most LLCs are formed online at the State Corporation Commission website, and therefore a generic statement that the company’s purpose is “any lawful purpose” is typically used.  Of course, people form these entities to transact various types of business, or even simply to hold assets.  Note that there may be reasons to organize your company as an entity besides an LLC (such as a corporation or partnership).  For more information on the differences between entity types, give us a call.

Your company’s “registered agent” is the person or entity that is formally listed as the contact for the company with the State Corporation Commission.  This is typically where any lawsuit against the company would be served and also where the State Corporation Commission mails annual renewal notices and other correspondence for the company.  Your registered agent can be an individual residing in Virginia who is a member or manager of the company, a member of the Virginia State Bar, or a domestic or foreign entity that is authorized to transact business in Virginia.  If your LLC has other entities as members, an individual with an interest in the entity (for example, a member of an LLC or an officer of a corporation) may also act as registered agent. 

Finally, the company’s “principal office” is the physical location where the company keeps its records.  Recordkeeping is an important part of successful management of LLCs (see the third installation in this series for more information), so it is critical that records are actually maintained at the principal office.

Once the Articles of Organization have been filed and the formation fee has been paid, you’re in business!  Typically, though, you’ll want to take one more step – signing an “operating agreement.”  The operating agreement is the contract that governs how an LLC will function and how the owners will coordinate running the company.  One of the most important decisions to be made when creating your operating agreement is who will manage the day to day operation of the company. LLCs may be “member-managed” or “manager-managed.”  Members are owners of the company; managers may be members, but are not required to be. Your operating agreement can also set out rules about holding meetings, admitting additional members, and financial contributions to, or distributions from, the company.  Absent an operating agreement, state law provides default rules that control the behavior and requirements of LLCs and duties of members to one another, so it is a good idea to create an operating agreement.  Every situation is different and chances are you will want to deviate from the default rules.  You may need an operating agreement for practical reasons, too – banks often require a copy of a company’s operating agreement before they will transact business with the company.  Finally, creating and abiding by an operating agreement is evidence that you take the company seriously, which can help others respect it if litigation ever arises (see the next post in this series for more on this topic).

You may also want to obtain a tax ID number (“EIN”) for the company.  If your company has two or more members, by default it will be taxed as a partnership (a “disregarded entity”) and will need its own EIN.  If the company is a single-member LLC, by default it is taxed as a sole proprietorship and is not required to have its own EIN.  However, it may still be convenient for the company to obtain its own EIN because the member may not wish to use his or her social security number to establish bank accounts, report income on W-2s, or distribute for purposes of 1099 reporting.   In addition to being taxed as a sole proprietorship, a single member LLC owned by one or more individuals can elect S Corporation status, in which case and EIN is required.   

With these steps, your LLC is ready to operate in the world as an independent entity. But there are continuing management steps you should take in order to make sure it continues to be considered separate from its members.For more information, keep an eye out for the next post in this series, LLCs and Finances. If you’re ready to create an LLC today, or have questions about managing your existing entity, we are here to help! Call us now to set up an consultation, 804.270.1300.

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