Forms / Contracts / Operating Agreements FAQ

I Want To Add An Owner To The LLC. How Do I Do That?

I Want To Add An Owner To The LLC.  How Do I Do That?

– Vanessa

 

Answer

Adding a new member to an LLC is typically an easy process in most states, however there are some states that require dissolving the LLC and reforming if there is any change in ownership.

First you will want to review the operating agreement to see if there are specific procedures that need to be followed. Many LLC’s don’t have an operating agreement since they operate as individual owners, which is fine, but if you do have one be sure to review it. That being said, if you don’t have one now, you will probably want to form one to outline each owner’s rights & responsibilities in addition to profit sharing. It’s much easier to hash this out now, rather than later when disputes arise.

If you have an operating agreement, you would need to prepare an amendment to add a new member to the LLC. This amendment should include the new member’s name, amount of investment, percentage ownership in the LLC and percentage of profits and losses from business operations that will be distributed. Members then vote on the amendment.

Last, be sure to look at how the LLC is taxed and whether you need a new FEIN number. LLC’s can be established with a social security number if they are taxed as a sole proprietorship. You can get a FEIN number at no cost from the IRS.

 

What Is The Best State To Form A Single Member LLC?

What state would be the best to form a single member LLC for an internet company?

– Travis, Connecticut

Answer

There are several different issues with the “best state” question for where to form your limited liability company.

1. Taxes : State of Your Personal Residence Is Best

If you are forming a single member LLC to be taxed as a disregarded entity (the most common choice), then the state of your residence (where you pay state taxes) is best.

Forming an LLC in another state will NOT save you on state income taxes, because the profits and losses of the LLC flow through onto your personal tax return.

Unlike a corporation, which pays its own federal and state taxes at the corporate level, an LLC does not. Instead, all the LLC’s profits will flow through to you, and be recorded on your state income tax return.

2. Annual LLC Fees

In pretty much every case, you will pay fewer fees forming your LLC in your home state than in some other state.

The problem with forming an LLC outside your home state is that to legally do business in your home state (e.g. working on your website), you must register in your state as well as a “Foreign LLC”. Yes, it’s a bit confusing: if you live in State X, but form an LLC in State Y, you will need to register your LLC in State Y as a foreign LLC.

As such, by forming an LLC outside of your home state of residence, you are doubling the number of states to which you must pay registration fees.

3. Corporate Law

For most small businesses, the differences in corporate law between states is irrelevant. I know that every article about Delaware discusses the pro-corporate law in Delaware, but unless you’re a large company that can hire expensive lawyers to actually utilize that law, it won’t do you any good.

What it will do is cause you to spend a lot of money forming a Delaware LLC, only to have to register in your home state as a foreign LLC.

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Can An LLC Be Sold?

Can an llc be sold?

– Sam, Illinois

Answer

Yes.

A limited liability company absolutely can be sold. A member can sell his or her membership interest, or, all the members can sell their interests to a single buyer, or all the members can agree to sell all the assets of the LLC to a buyer.

Some LLCs will place clauses in their Operating Agreement preventing members from selling their interests to outsides without first offering existing members the opportunity to purchase. This is a relatively common provision, but it is not mandatory, and your LLC could permit free exchange of membership interests.

A “membership interest” is similar to the concept of “shares” in a corporation. If you own 40% of the membership interest in an LLC, it’s like owning 40% of the stock in a corporation (LLCs have many similar concepts as corporations, but different terminology).

These transfers of LLC interests involve contracts and paperwork, of course.

If you have a particularly complicated transaction, you ought to have a lawyer take a look at it. However, providing your lawyer with form documents to begin from will make their job easier, faster and likely result in a lower legal bill (sometimes substantially lower).

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How Do You Record Capital Contributions In An LLC?

Would it be sufficient to write “capital contribution” or “start up” on the memo line of your check from your personal account in terms of documentation or should you draw up a contract in terms of start cost and ongoing company expenses until you make a profit?

Answer

If this is a single member LLC, then you can probably get away with simply writing “capital contribution” on the check for startup money.

If you are a member of multi-member LLC, you need to have an operating agreement and make sure that it addresses what happens to your capital contribution to protect your rights vs. the rights of the other members in the LLC to a return of the capital contribution.

For example, say you make a $10,000 capital contribution to the LLC and you have 3 fellow members. You are all equal 25% owners.

Suppose the LLC makes a $20,000 profit in year 1.

How is that allocated?

Does each member get $5,000?

Do you get your $10,000 back first, and the remaining $10,000 is divided 4 ways? (eg. you get $12,500 and the other three each get $2,500).

Some other method?

In other words, while the memo line method would establish that the check to the company was a capital contribution (compared to, for example, payment for services or a loan to the company), it would not spell out the members’ rights to the capital contribution after the company earns profits and, one day, eventually dissolves.

How your capital contribution is treated is determined by your operating agreement.

If you don’t have a written operating agreement, and there are multiple members in your LLC….get one.

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Do I Need To File An Operating Agreement Within The State?

Do I need to file an operating agreement with the state? If you don’t have to file the operating agreement with the state, where should one keep it? In addition can you amend the articles of organization to add a founding member or is that what is covered in the operating agreement.

Answer

You didn’t tell me your state, and some of the answers depend on what state you’re in.

Whether you need to file your operating agreement with the state depends on which state you live in.

When you use an LLC formation company, they will let you know during the formation process what filings are necessary.

If your state does not require filing of operating agreements, you should keep it where ever you store important documents (safe deposit box, a file cabinet at home, in a pile of papers on the kitchen table….just kidding about the last one). Your LLC’s operating agreement spells out the rights of the members in the LLC in case of a dispute among the members, and important asset provision vs. creditors of the LLC and/or the members. It’s important to have an operating agreement, and preferably in writing (even if your state does not require it).

Also, some states require amending articles of organization to add new members, but with most you simply update your operating agreement.

Furthermore, many states require LLCs to file annual reports, and one of the pieces of information on an annual report is to identify all of the members. Therefore, you will update the state on the number and identity of the members, though that does NOT necessarily mean that the state is provided a copy of your LLC’s operating agreement.

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Tax Question When Forming An LLC In Nevada W/ Husband & Wife As Members

If forming an LLC in Nevada w/ husband & wife as members if we elect sub s – can IRS decide to treat as a single member LLC because we are married?

– Jerry, Georgia

Answer

You can choose either method of taxation–partnership or disregarded entity.

Use IRS Form 8832 (opens to a PDF in a new window–turn off your pop-up blockers) to elect your tax classification for your limited liability company.

If you don’t elect a specific taxation method, the IRS can/will choose one for you. That’s why it’s important to decide which you want at the beginning and make your election in writing, via the proper form.

Note: Because Nevada is a community property state, the IRS permits a husband and wife LLC to be treated as a QJV- Qualified Joint Venture. This is not so in non-community property states–husband and wife LLCs are taxed as partnerships (or corporations), but not as disregarded entities.

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Unsigned Operating Agreements

I have been with a company 14 months where another person filed the company registration papers with the state. A partnership agreement was draw up sent to my attorney we countered and ultimately the agreement was never agreed to or signed. Does that mean there is no partnership? What are my legal rights/risks in IL to walk away from the company?

Answer

Is this a “partnership” or an LLC? I’m going to assume it’s an LLC, and that you are using “partnership” in the colloquial and not legal sense. If they were drawn up by an attorney for an LLC, they would be labeled an “Operating Agreement”.

You need to verify whether these “registration papers” were Articles of Organization (for an LLC) vs. the formation of a limited partnership under Illinois law.

First off, you really need to see a licensed Illinois attorney who is familiar with LLC and closely held business disputes (e.g. not the guy who fixed your DUI).

But, you can get yourself familiar with the overall picture, so you can follow your lawyer’s reasoning.

Without a signed Operating Agreement, you’re stuck with the “default” rules in Illinois under the Illinois Limited Liability Company Act.

805 ILCS 180/et. seq.

You can view the entire act here (grab a cup of coffee–you’ll have a tough time staying awake reading this):

Illinois Limited Liability Company Act

You want to look at section 805 ILCS 180/35-50&70 (Dissolution/Dissociation).

Unsigned llc operating agreement legal?

by chris
(new hampshire)

I wish to leave an llc I have been a part of for a few months now. An operating agreement was drawn up but never signed by either party.

Is there any action I need to take at this point? I have not signed any documents, agreements, etc associating me with this llc, everything has been verbal and in good faith.

Can I simply walk away?

Thanks,
Chris

Answer

Is your name listed on the Articles of Organization?

Is your name on any bank accounts of the LLC, or have you signed any leases, opened a credit card, or any other activity that associates your name with the company?

If the answer to any of the above is yes, then the safest route is to formally remove yourself as a member.

Because you don’t have a signed operating agreement with the other members of your LLC, you are at the mercy of New Hampshire’s default LLC statutes.

You’re going to need to see a New Hampshire attorney about this one to draft documents complying with NH law.

Another question about unsigned operating agreements:

What are the possible downfalls of not having ones name on an LLC , when you have a partnership?

(New York)

I own a business in NY and an LLC was formed in CT by my partner (where he resides) for this business. His is the only name listed on the LLC, but he is as I said a partner in the NY business. Will the fact that my name is not on the LLC have any repercussions on the business (or me personally for that matter) should the business ever become for sale, or, if there are any possible royalties incoming from an entity that may want to “buy-in” or invest in the property?

Answer

Some questions for you:

1. After the CT limited liability company was formed, did you transfer the assets of the NY business into the CT LLC? In other words, does the CT LLC own anything?

2. What form was the NY business in before your created the CT LLC? (e.g. did you have a partnership, a sole proprietorship, a corporation, etc.).

3. If the NY business was an incorporated entity, are there documents showing a purchase of the the NY business by the CT LLC?

Your interest in the LLC is not determined by who is listed in the Articles of Organization. It is determined by how many membership interests you own.

You should have documentation in your Operating Agreement stating what percentage of the LLC you own. If the LLC started out with your partner owning 100%, and then you purchased 50% of the membership interests, there should be a purchase and sale agreement for the membership interests.

Unsigned operating agreement

by David Smith

(Atlantic beach, Florida)

What is the legal standing of an unsigned Florida LLC operating agreement. I believe that no company is formed and the document can be change at will until signing.

Answer

I think you are confusing Articles of Organization with an operating agreement (don’t feel stupid, these are common mistakes).

No LLC is formed until the Articles of Organization are filed with, and accepted by, the state of Florida.

If Articles have been filed and accepted, a company is formed.

The operating agreement governs how the LLC will be run. An unsigned operating agreement is not going to be binding (though an oral operating agreement is binding in some states), and therefore Florida’s default LLC rules will govern the LLC.

Whether the operating agreement is signed or unsigned, it can be amended by written consent of all the parties to it.

Is this operating contract valid?

In March 2008, A, B and C, who are all US citizens based in San Francisco, enter into an Operating Agreement for their newly formed California Limited Liability Company. Each of the parties has signed the agreement by logging into a website with their personal username and password and clicking on an ‘Agree’ button after having the chance to scroll through and read the agreement.

Answer

I would ask an attorney about this one. There might be an electronic signature act that covers these types of agreements.

Is there no paper document as well?

Courts are very old fashioned, and they like paper (if this were to ever go to court).

What Is The Difference Between An LLC Membership Agreement versus Operating Agreement

Is there a difference between an LLC Membership Agreement and an LLC Operating Agreement? Thank you. Based on some quick research, they seem to be the same thing.

Answer

They are the same thing.

While many states do not require a limited liability company to have an Operating Agreement, it is nonetheless a good idea to have one drafted.

If your LLC consists of multiple members, then it is imperative that your LLC have a written Operating Agreement.

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LLC Operating Without An Operating Agreement And Managing Member Controls Everything

I was told it is illegal in the State of Missouri to operate an LLC without an Operating Agreement. Please enlighten me. An Operating Agreement was never signed by the members. A “draft” was put together but that is where it stopped. To make a long story short, the members are blaming one member for all of the problems of the LLC, however this member is not the managing member of the LLC and has no control over anything.

Also, what can a member of a small LLC do when the managing member refuses to provide requested information such as financials and the member is attempting to sell their share but without information can not. The LLC operates at a loss and it is only at the end of the year when the LLC demands money from the members to pay such things as Taxes.

All members are equal partners – 1/3; 1/3; 1/3.

The LLC was set up to purchase and manage a commercial building.

– Dan, Missouri

Answer

If there is significant money at stake here (or potential liability), you need a lawyer.

As far as it being “illegal” to have an LLC without an operating agreement in Missouri, here is how the statute reads:

      § 347.081 RSMo. Operating agreement, contents — policy statement — enforceability, remedies
      1. The member or members of a limited liability company shall adopt an operating agreement containing such provisions as such member or members may deem appropriate, subject only to the provisions of sections 347.010 to 347.187 and other law.
      The operating agreement may contain any provision, not inconsistent with law, relating to the conduct of the business and affairs of the limited liability company, its rights and powers, and the rights, powers and duties of its members, managers, agents or employees, including…

So, Missouri law does say that an LLC “shall” adopt an operating agreement.

It doesn’t say it needs to be writing.

So, what kind of verbal agreement do the members have?

My guess is that each one has a different recollection of what they agreed to.

You see where this is going?

If there is significant money at stake, resolving this situation could involve large legal fees.

For everyone out there reading this, it is critical that you have a written operating agreement for your LLC.

This is a place where money spent on a lawyer–particularly if there is a lot of money in the company and multiple members–might be well spent.

In either case, the operating agreement is the first thing any lawyer will ask you when it comes time to resolve disputes among the members.

Without a written agreement, we are stuck with “he said, she said”, which are almost always more costly and risky to litigate then when you have written documents to rely on.

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No Operating Agreement

In December of 2008, we ended the corporation that had Articles of Incorportation. On the advice of our accountant we created a new LLC, however, we did not complete an operating agreement. What are the dangers in this? As well as, since we are married and in business together… what proof do I have that I actually own a portion of the business (in case he tells me to hit the road)…

– Julie, Kansas

Answer

The dangers in not creating a written operating agreement is that your LLC will be governed by the state LLC statute in which you formed your LLC.

In your situation, Kansas.

Do you know Kansas’s LLC statute off the top of your head? Neither do I.

That’s the danger–you have no idea what your rights are in the LLC because they are controlled by Kansas’ LLC statute.

In terms of proof of ownership, are you listed as a member in the Articles of Organization? If not, you’re going to have to find other documents that evidence your ownership.

Evidence of your ownership could include things like: being listed on the business bank account as a signatory, emails from the other members where they speak as if you’re an owner, contracts with third parties where you signed as an owner, loan documents for the company listing you as an owner and guarantor, and so on.

However, an operating agreement is the best way of showing ownership in the LLC.

While creating an LLC yourself by downloading filing Articles of Organization is cheaper than paying Legalzoom to do it for you, you miss out on valuable features like an operating agreement.

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No Operating Agreement Signed Yet After 6 Months?

Started an LLC just over 6 months ago. My husband and myself along with another husband and wife.

Having disagreements on the operating agreement from the beginning. Went to an attorney, who happened to be their (our partners) family friend.

Had our attorney look over it and make our necessary changes. Gave them our changes and never heard anything again.

When we started its written on scratch paper by our accountant, who formed our LLC online through LegalZoom.com. The paper stated the LLC is managed by all operating members, meaning our partners wife was not going to work.

Husband 1 has 51%
Husband 2 (my family) has 49%
Than each gave the wives 20% out of their share.

Business has been good, $300,000 billed out since we have started in last week of May 2007.

Here’s the kicker for me. Unfortunately my husband trusts everybody! I DON’T! From day one, even though its written 51/49, everything has been 50/50 when it comes to money being put into the company.

Now, our partner says today “How far you want to take this, I think we need to dump in a lot of money to get this business rolling and I know you don’t have it?”

Then interrupted by a phone call and said we would discuss this later….

I knew it from day one that he would do this. To be honest, he is a bored millionaire and now he doesn’t need us. I’m furious!!!

Guess what I need to know is are we screwed, in every sense, since we never got our operating agreement done??

Trying to find some answers and not be taken advantage of.
– Donna, Nebraska

Answer

There are a couple of ways to answer this, and I’m sure other will comment as well.

Without an operating agreement, your state’s default rules kick in to determine profit and loss sharing.

In most states, profits and losses in an LLC are split proportionally to either ownership interest or capital contributions. This is unlike a partnership, where it’s presumed 50-50 unless there’s a writing to the contrary.

We’re only talking about a 1% difference in your situation, but I think the bigger concern is that you feel you’re getting squeezed out of your company by the fact that your other members are requiring capital contributions in excess of your capacity.

Operating agreements cover issues like ongoing capital contributions, which is one of the reasons you were smart to get a local attorney to draft one for you. Unfortunately, many people are more eager to run their business than sign contracts, and your OA is sitting unsigned.

I would talk to your attorney to determine your state’s default rules and see if you’re required to make additional capital contributions, and if not, what the effect is of your partner making additional contributions (does their ownership interest increase, or do they merely have first right to withdraw their additional capital contributions before you can draw profits?)

Eventually I’m going to create a new section on this site summarizing the default rules by state, as these become very important when dealing with partners and non-existent operating agreements (if you’re operating a single-member LLC, you can simply change your rules along the way by signing a new agreement with yourself).

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Does The Operating Agreement Need To Be Notarized?

Does the Operating Agreement need to be notarized? If not, how do you know that the person who prepared it did not just change it and put the signature page at the end?

– Cory, Arizona

Answer

On long contracts (which an Operating Agreement essentially is–a contract among members of the limited liability company), it is common to have a space on the bottom of each page for the parties to initial.

That way, you can avoid concern over pages being inserted in the middle, with the signature page remaining the same. If a page were inserted, the initials would be missing.

By the way, notarization wouldn’t help in that situation, as a party could simply replace pages after the signature page was notarized.

I am not aware of any state law which requires Operating Agreements to be notarized in order to be enforceable among the parties.

Swapping pages in a contract is very blatant fraud. Hopefully, you will not do business with those kinds of people.

One way to protect yourself is to create a paper trail of drafts of the documents as you exchange them during negotiations. In the event of litigation, you’d have evidence to support your story that pages were swapped.

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Operating Agreement For LLC Engaged In Stock And Forex Investing

Want to form and LLC that will invest and trade in stocks and possibly later in the forex markets.

Will start off with myself and one investor.

I want to maintain control over all aspects of the business, the investor will be passive. However, profit will be allocated based on percentage of capital contributed.

I presume this is possible and I presume this will require an Operating Agreement.

Would such an Operating Agreement need to be completely written from scratch or will one of the online sites like legal zoom be able to handle this?

Also, if in the future a few more investors want to contribute capital and become members, would the operating agreement need to be revised – or can it be written to permit additional investors to join in the future?

Thanks.

– Austin, Indiana

Answer

You are proposing is entirely possible. Pretty much any arrangement you can think of can be accomplished in an LLC, if you draft the operating agreement accordingly.

Then, take that operating agreement to a local attorney who specializes in small business transactional issues, and have him/her review it. Explain to the attorney exactly what you are trying to accomplish with respect to your investors, payouts, etc. (similar to what you described in your question).

Have him/her verify that the operating agreement does that. If changes need to be made, then let the attorney make them.

While it seems like adding an extra step, this process I just described will be FAR FAR cheaper than just going to an attorney and asking her to draft an operating agreement from scratch.

Good luck!

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Operating Agreement For NJ LLC (Single Or Multi)

Hello I have registered an LLC in the state of NJ in 2000 and being sole member I didn’t care to create an operating agreement till I have the need now to produce one.

Though I am the only member, if I want to add more in the future, how shall I structure my operating agreement?

If I create a Single member Operating agreement, Can I be able to change it later to reflect multi-member? Does this operating agreement need to be submitted with the state authorities or IRS? Appreciate if you could share some light on this.

– Roger, New Jersey

Answer

The IRS does not need a copy of your operating agreement, and neither does the state.

However, the operating agreement is the document that governs the relationship between the members of the LLC, and between the LLC and its members.

Without a written operating agreement, the default rules of your state govern your relationship with your fellow members and between you and the LLC.

Regarding your question about amending an operating agreement–yes, you absolutely can amend it. In fact, it is extremely common to amend and/or restate operating agreements.

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Operating Agreement for Texas LLC

I have a Texas LLC with two members. One member wants to resign and I will remain as a single member LLC.

Because members can not resign LLC member in Texas – I understand, I need an Operating Agreement – which operation agreement is required for this type situation.

Answer

You’re going to need an Operating Agreement that has as one of its provisions the ability for a member to resign.

Don’t confuse “Operating Agreement” with Articles of Organization–they are two different things entirely. Articles of Organization create your LLC as a legal entity with the state. However, they don’t define how your LLC operates–that’s what the Operating Agreement is for.

You’re going to need to have an Operating Agreement drawn up in order to resign from the Texas LLC.

If you used an attorney to form the LLC, then use him or her to create and Operating Agreement and have you resign as a member.

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Do We Need An Operating Agreement For A Real Estate LLC?

I am forming a real estate LLC with my wife. Do we need an operating agreement? We split the ownership 50%-50%.
Thank you

– Francisco,  Texas

Answer

You really ought to have an operating agreement for your limited liability company.

While Texas law does not require you to have an operating agreement (they are called “company agreements” in Texas), it is nonetheless a good idea to have one.

Many banks will require you to show a copy of your operating agreement in order to open an account. If your LLC tries to borrow money, a lender will almost certainly want to see that the LLC is authorized to do so under its operating agreement.

When you form an LLC with Legalzoom, they include a customized operating agreement in the price of forming your LLC.

While you can have an attorney draft an operating agreement for you, it will be far more expensive than having one made as part of an LLC formation package from a company such as Legalzoom.

If your business operations become very complicated and you need a more customized operating agreement, you will save money by having your attorney modify your existing agreement rather than trying to create a document from scratch at the beginning when cash is tight and you’re not 100% certain what provisions you need anyway.

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Sell an LLC

Can I sell our LLC without an operating agreement we never did one (stupid yes) my partner is non responsive since we had a little tiff. I am the manager of the llc and he of course is a member. he is just wanting to be a hard ass since I know he needs the money worst than me It doesn’t make any since I have a buyer that has presented an offer that I would accept. Please help

– Makr, Florida

Answer

Yes, you can sell an LLC without an operating agreement.

However, you also have the issue of getting your partner to sell his share–either to you or to the new buyer.

See a Florida lawyer about forcing a buyout of the other member’s share.

Because you don’t have an operating agreement, Florida law controls, and not being a Florida lawyer, I don’t know what it says or how Florida courts interpret it (which can sometimes be two different things).

The other solution, if Florida law permits, is to sell your share without selling the other member’s. I doubt that your new buyer will be interested in “buying a lawsuit”, but you never know.

Unfortunately, this is why you need to have an operating agreement. I won’t lecture you because you already apologized 😉

However, remember why you formed an LLC–to reduce risk.

Well, a big risk in business are disputes with partners. A good way to reduce that risk is to get your agreement in writing.

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How To Answer The Specific Purpose Question When Forming A Missouri LLC

In Missouri, it asks for your “specific purpose” of doing business. If you put something, for example online selling, does that mean that in the future if you decide to sell art work from your home or out of a brick and mortar that you couldn’t do it from that business?

Thanks.

– Jackie, Missouri

Answer

In the old days, corporations had very defined statements of purpose.

If the corporation performed business activities not defined in their corporate charters and/or articles of incorporation, these acts would be considered ultra vires, and voidable by the company under certain conditions.

This could cause a lot of problems for anyone dealing with that business–they would literally have to read the corporate charter before engaging in a transaction.

That sounds confusing, right? Well, you’re not the only one confused. Which is why many states, including Missouri in your example, permit the following to be used in describing your LLC’s business purpose:

2. The article listing the purpose or purposes should include at least one sentence which defines the specific purpose for which the company is organized (for example, what it will do to make a profit). You may also include, if desired, a purpose statement such as

“and all other legal acts permitted limited liability companies.”

Taken from Missouri limited liability company Articles of Organization Instructions.

So, here’s your solution. Enter one sentence explaining your business’s main activity as you think it will be now. Then, add the following language to the end of the sentence:

“and all other legal acts permitted limited liability companies.”

If you are forming a real estate holding company, for example, it could read:

To purchase, sell, hold, own, and operate real property within the state of Missouri and and all other legal acts permitted limited liability companies.

This will protect you in case your business direction changes over time.

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Transfer Of Voting Rights

We want to protect our voting rights as members if a member dies. Its ok with us if a spouse or other person inherits the ownership but not the voting power. Can we stipulate in the operating agreement that if a member dies, her or his votes are distributed to the other members in proportion to their ownership shares?

– Sharon, Hawaii

Answer

Yes you can, sort of.

You can craft an operating agreement that gives the other members the first right of refusal to purchase the membership interests in the event a member dies.

The operating agreement can also specify that new members must be voted in or otherwise approved by existing members in order to have decision making power in the company.

However, I strongly suggest that you contact a licensed attorney in your state who is experienced in drafting LLC operating agreements.

The type of legal work you’re describing is not for do-it-yourselfers unless you happen to be an attorney who has drafted these documents before.

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Unsigned Operating Agreements

I have been with a company 14 months where another person filed the company registration papers with the state. A partnership agreement was draw up sent to my attorney we countered and ultimately the agreement was never agreed to or signed. Does that mean there is no partnership? What are my legal rights/risks in IL to walk away from the company?

Answer

Is this a “partnership” or an LLC? I’m going to assume it’s an LLC, and that you are using “partnership” in the colloquial and not legal sense. If they were drawn up by an attorney for an LLC, they would be labeled an “Operating Agreement”.

You need to verify whether these “registration papers” were Articles of Organization (for an LLC) vs. the formation of a limited partnership under Illinois law.

First off, you really need to see a licensed Illinois attorney who is familiar with LLC and closely held business disputes (e.g. not the guy who fixed your DUI).

But, you can get yourself familiar with the overall picture, so you can follow your lawyer’s reasoning.

Without a signed Operating Agreement, you’re stuck with the “default” rules in Illinois under the Illinois Limited Liability Company Act.

805 ILCS 180/et. seq.

You can view the entire act here (grab a cup of coffee–you’ll have a tough time staying awake reading this):

Illinois Limited Liability Company Act

You want to look at section 805 ILCS 180/35-50&70 (Dissolution/Dissociation).

Unsigned llc operating agreement legal?

by chris
(new hampshire)

I wish to leave an llc I have been a part of for a few months now. An operating agreement was drawn up but never signed by either party.

Is there any action I need to take at this point? I have not signed any documents, agreements, etc associating me with this llc, everything has been verbal and in good faith.

Can I simply walk away?

Thanks,
Chris

Answer

Is your name listed on the Articles of Organization?

Is your name on any bank accounts of the LLC, or have you signed any leases, opened a credit card, or any other activity that associates your name with the company?

If the answer to any of the above is yes, then the safest route is to formally remove yourself as a member.

Because you don’t have a signed operating agreement with the other members of your LLC, you are at the mercy of New Hampshire’s default LLC statutes.

You’re going to need to see a New Hampshire attorney about this one to draft documents complying with NH law.

Another question about unsigned operating agreements:

What are the possible downfalls of not having ones name on an LLC , when you have a partnership?

(New York)

I own a business in NY and an LLC was formed in CT by my partner (where he resides) for this business. His is the only name listed on the LLC, but he is as I said a partner in the NY business. Will the fact that my name is not on the LLC have any repercussions on the business (or me personally for that matter) should the business ever become for sale, or, if there are any possible royalties incoming from an entity that may want to “buy-in” or invest in the property?

Answer

Some questions for you:

1. After the CT limited liability company was formed, did you transfer the assets of the NY business into the CT LLC? In other words, does the CT LLC own anything?

2. What form was the NY business in before your created the CT LLC? (e.g. did you have a partnership, a sole proprietorship, a corporation, etc.).

3. If the NY business was an incorporated entity, are there documents showing a purchase of the the NY business by the CT LLC?

Your interest in the LLC is not determined by who is listed in the Articles of Organization. It is determined by how many membership interests you own.

You should have documentation in your Operating Agreement stating what percentage of the LLC you own. If the LLC started out with your partner owning 100%, and then you purchased 50% of the membership interests, there should be a purchase and sale agreement for the membership interests.

Unsigned operating agreement

by David Smith

(Atlantic beach, Florida)

What is the legal standing of an unsigned Florida LLC operating agreement. I believe that no company is formed and the document can be change at will until signing.

Answer

I think you are confusing Articles of Organization with an operating agreement (don’t feel stupid, these are common mistakes).

No LLC is formed until the Articles of Organization are filed with, and accepted by, the state of Florida.

If Articles have been filed and accepted, a company is formed.

The operating agreement governs how the LLC will be run. An unsigned operating agreement is not going to be binding (though an oral operating agreement is binding in some states), and therefore Florida’s default LLC rules will govern the LLC.

Whether the operating agreement is signed or unsigned, it can be amended by written consent of all the parties to it.

Is this operating contract valid?

In March 2008, A, B and C, who are all US citizens based in San Francisco, enter into an Operating Agreement for their newly formed California Limited Liability Company. Each of the parties has signed the agreement by logging into a website with their personal username and password and clicking on an ‘Agree’ button after having the chance to scroll through and read the agreement.

Answer

I would ask an attorney about this one. There might be an electronic signature act that covers these types of agreements.

Is there no paper document as well?

Courts are very old fashioned, and they like paper (if this were to ever go to court).

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Is An Unsigned LLC Operating Agreement Legal?

I wish to leave an llc I have been a part of for a few months now. An operating agreement was drawn up but never signed by either party.

Is there any action I need to take at this point? I have not signed any documents, agreements, etc associating me with this llc, everything has been verbal and in good faith.

Can I simply walk away?

Thanks,
– Chris, New Hampshire

Answer

Is your name listed on the Articles of Organization?

Is your name on any bank accounts of the LLC, or have you signed any leases, opened a credit card, or any other activity that associates your name with the company?

If the answer to any of the above is yes, then the safest route is to formally remove yourself as a member.

Because you don’t have a signed operating agreement with the other members of your LLC, you are at the mercy of New Hampshire’s default LLC statutes.

You’re going to need to see a New Hampshire attorney about this one to draft documents complying with NH law.

Back To LLC Questions & Answers

What Are The Possible Downfalls Of Not Having One’s Name On An LLC

I own a business in NY and an LLC was formed in CT by my partner (where he resides) for this business. His is the only name listed on the LLC, but he is as I said a partner in the NY business. Will the fact that my name is not on the LLC have any repercussions on the business (or me personally for that matter) should the business ever become for sale, or, if there are any possible royalties incoming from an entity that may want to “buy-in” or invest in the property?

Answer

Some questions for you:

1. After the CT limited liability company was formed, did you transfer the assets of the NY business into the CT LLC? In other words, does the CT LLC own anything?

2. What form was the NY business in before your created the CT LLC? (e.g. did you have a partnership, a sole proprietorship, a corporation, etc.).

3. If the NY business was an incorporated entity, are there documents showing a purchase of the the NY business by the CT LLC?

Your interest in the LLC is not determined by who is listed in the Articles of Organization. It is determined by how many membership interests you own.

You should have documentation in your Operating Agreement stating what percentage of the LLC you own. If the LLC started out with your partner owning 100%, and then you purchased 50% of the membership interests, there should be a purchase and sale agreement for the membership interests.

Back To LLC Questions & Answers

What Is The Legal Standing Of An Unsigned LLC?

What is the legal standing of an unsigned Florida LLC operating agreement. I believe that no company is formed and the document can be change at will until signing.

Answer

I think you are confusing Articles of Organization with an operating agreement (don’t feel stupid, these are common mistakes).

No LLC is formed until the Articles of Organization are filed with, and accepted by, the state of Florida.

If Articles have been filed and accepted, a company is formed.

The operating agreement governs how the LLC will be run. An unsigned operating agreement is not going to be binding (though an oral operating agreement is binding in some states), and therefore Florida’s default LLC rules will govern the LLC.

Whether the operating agreement is signed or unsigned, it can be amended by written consent of all the parties to it.

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What Does An Annual Report For An LLC Look Like?

Do I really have to send in an annual report for my LLC if it hardly makes any money and is a small business? If so, what form does it need to take? Is there an example provided for a small business owner to use as a framework?

Answer

It depends on the state.

Some states require annual reports, many do not.

Each state will have its own format for annual reports.

These are usually not like the “annual reports” that publicly-traded companies issue (e.g. a 10-K), but rather a short form showing the ownership of the LLC, current address, etc.

For example, here are the annual reporting requirements for a Hawaii LLC:

Annual Report: A limited liability company shall file an annual report that lists:

  • The name of the company and the state or country under whose law it is organized
  • The mailing address of the company’s principal office
  • The street address of its registered office in this State
  • The name of its registered agent at its registered office in the State
  • Whether the company is manager-managed, and if so, the name and address of each manager, and the number of members; or if not, the name and address of each member.

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What Tax Forms For An LLC Are Used For Rental Investment Property?

We have a 10 member LLC used for Investments.
We file the 1065, with K-1’s sent out to each member.

This year, 2 members got a Loan, purchased a Rental House as an Investment.

Question
1. What Tax forms do we need to use to figure their portion of the LLC?

2. What Tax Forms would they need to use in their own Personal Tax Returns?

I have really enjoyed your Posts… I hope this one isn’t over the Edge.
Be Blessed Investors,

– Randall, Iowa

Answer

Your multi-member LLC is taxed as a partnership.

Form 1065–which you have already been using–is the proper form for your partnership’s tax returns.

The individual LLC members will use the K-1 they receive to record their income (or loss) on their personal tax returns.

Is this new rental house the member’s purchased part of the LLC, or a side venture outside the 10 member LLC?

If it’s outside the LLC, and they own it in their own name, then it would be recorded on Schedule C. Schedule C is part of your personal 1040 return.

If the investment was inside the LLC, then the members need to decide among themselves how to allocate income, expenses, profits/losses, and distributions.

LLC law is very flexible when it comes to these decisions, which is both good and bad. It’s good because you can pretty much devise any profit sharing scheme you want. It’s bad because you have to make these decisions, and these decisions have tax and other consequences.

When it comes to multi-member LLCs with complicated tax issues involving loans to the LLC, uneven contributions of property from a subset of members, and so forth, there’s one piece of advise to give:

See an attorney.

I know you’d like to get your answer from “some guy on the internet”, but trust me, you don’t 🙂

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Writing Cost Estimates And Contracts From An LLC

On the subject of limiting liability to the LLC, I understand that contracts need to by signed by the LLC and not a person (i.e., it is signed by a member of the LLC on behalf of the LLC).

So, if I am writing a cost estimate (that will function as a contract), and and if I will sign it properly by the LLC, can I still use “I” in the letter? (My question is regarding ruining the legal liability protection, not grammar.)

Examples: “I am writing to provide the requested cost estimate…” or “I estimate the work can be completed by Sept 8…”.

Thanks!

– C.D., Colorado

Answer

It’s fairly common for an incorporated business such as a limited liability company or corporation to use pronouns such as “I” or “we” in contracts. As a note, a bid or estimate can be a binding contract if it meets the legal requirements of offer, acceptance, and consideration.

The primary risk with the language in a contract is not that you’ll inadvertently pierce the corporate veil, but rather that you personally will become a party to the contract when you intended for only the LLC to be a party.

Here are a few steps you can take:

1. The letterhead of the contract/bid should clearly state that it is XYZ, LLC entering into the contract, not John Smith.

2. The signature line needs to read something such as:

XZY, LLC

By:______________________(sign here)
Its:_Member of XYZ, LLC__

3. If you want to be very careful, the first paragraph of your contract/bid can read something like:

This contract is made and entered into on this _________ (date), by and between XYZ, LLC, a Colorado limited liability company (“Us” or “We” or “Contractor”) and ________________, (“You” or “Customer”).

Then, make sure you consistently use the terms as you defined them above.

On the flip side, if you are dealing with a limited liability company, but you want to hold the owner’s personally accountable and not just the LLC, then you’ll need to either have them explicitly sign the agreement in their personal capacity or have them sign a separate personal guaranty document.

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