Step 3: Filing the Articles of Organization
What is filed? Check the instructions that come with the Articles of Organization you got from your state. Please note that some states allow for electronic completion of the articles of organization (such as Arkansas). In most instances, you file two originals of the Articles of Organization together with the proscribed filing fee. Read the instructions carefully to obtain the correct filing fee and have the package addressed to the proper location. If you live in a larger city, the state will likely have a corporate office local. In some states, a cover sheet also is filed with the articles. The state web site will have instructions. When accepted by the state, you will receive back an embossed certificate evidencing that your LLC now exists under the laws of this state. Besides a Tax I.D. number issued by the IRS, the certificate of existence is a document most banks or other financial institutions will want to see before allowing you to open an account in the LLC's name.
What else needs to be filed? In most states, that is it. In a few, you also need a license to transact business in addition to the certificate of existence. Also, the city where your offices are located may require that your LLC obtain a business license. In Arizona, one also must publish a notice that the LLC has been established. See the Arizona web site for additional information.
Tax Forms. A single member LLC with no employees does not need an Employment Identification Number (EIN). If you have more than one member in your LLC or employees, then the LLC will need its own federal tax identification number. This is obtained by filing a form SS4 with the IRS. Note: The IRS now has an online SS4 application system for immediately obtaining an FEIN. Here is a link to the instructions for filing Form SS-4 for more information. Most states will also require you to obtain a state tax identification number. The state corporate office, either by phone or through their web site, can help you obtain the correct form for doing this. In most instances, the state taxing authority will contact you by mail on its own after the LLC articles of incorporation have been filed.
Filling out IRS Form SS4--Question 8(a) There is one important point to remember when filing out the IRS form SS4 to obtain your tax federal identification number. Question 8a asks you to check the box that best describes the type of entity you are seeking a tax ID number for. The popularity of LLCs is due largely to the fact that they are taxed as a partnership, have limited liability for corporate indebtedness, and have more flexibility than S Corporations. In order to ensure that your LLC is taxed as a partnership (i.e., that there is no corporate level income tax), you must check the box for "partnership" in response to question 8a. If your LLC has only one member, you cannot check the "partnership" box and, instead, check the box for "Other" and write next to this box: "disregarded entity". The IRS will accept your classification on the SS4 so it is a great benefit to check the right box. We suggest you consult a tax accountant regarding choice of tax status for your LLC. There may be situations where corporate tax status is advantageous for an LLC.
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Link to Sample LLC Operating Agreement created using the MedLawPlus.comŽ forms system (note: the sample is in Adobe PDF format).
Step 4: LLC Member Operating Agreement
What goes into an operating agreement? "Members" of an LLC are the owners of the business just as shareholders are the owners of a corporation. The following are some of the more important topics that the members should agree upon in their operating agreement:
- Who are going to be the initial members?
- How will profits and losses be shared or allocated among the members?
- How many LLC units shall each member have out of the authorized total?
- What capital contributions are to be made by each member?
- What services shall each member be required to perform for the LLC?
- If the LLC is going to have "managers", then the number of managers, the identity of the initial managers, and the division of responsibility between the managers and the LLC members as a whole;
- Vote percentage required for admission of new members;
- Level of restrictions upon member transfers of LLC units.
Why is it important to have a written operating agreement? First, entities which may transact business with the LLC such as banks, title companies, buyers and sellers of assets often ask to see the written LLC Operating Agreement to verify that the individuals signing the closing documents to the transaction have the authority to do so. An LLC Operating Agreement is the only document that can definitely give that verification of authority. Secondly, and more importantly, a business relationship is not unlike a marriage: they frequently go sour over time. Memories become hazy as the years pass and, what was clearly agreed to orally between the members upon the initial formation of the LLC, becomes an area of contention when the members later conflict with one another. Finally, having a lawyer prepare an LLC Operating Agreement for the members or using the MedLawPlus.comŽ forms system will likely bring to light issues that the members contemplated at the formation of the business. Hopefully, this short treatment of LLC formation has helped you see some of those areas already.
Are LLC operating agreements required under state law? Must operating agreements be written? Here is a link to a survey of state laws on LLC operating agreements.
Miscellaneous Matters
LLC Units are Securities. Please note that LLC ownership interests are considered a "security" under state law and the federal securities acts. Although there are exemptions for small offerings, you must check and comply with all federal and state securities laws before offering any LLC interest for sale.
Disclaimer. Please read our disclaimer set forth at the bottom of this page which urges you to consult an attorney when using the MedLawPlus.com legal forms system. Also, you should be advised by a tax accountant or attorney regarding the tax consequences of the formation and expected operation of your LLC prior to finalizing formation.
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