Altus Legal
THE LAW FIRM FOR ENTREPRENEURS

Articles

What is a Limited Liability Company?

A Limited Liability Company (LLC) is a business structure that, when set up and operated correctly, protects the owner(s) of the business from having personal liability for the debts and obligations of the business. An LLC is similar to a corporation in this respect, but with less administrative burden required of the owner(s). Owner(s) of an LLC are called “members”. Another benefit of an LLC is that it has the flexibility of being taxed as a partnership, or as a corporation, which provides its members with options as the business grows and changes.

The documents needed to form an LLC consist of the “certificate of organization” (known by other names in other jurisdiction, e.g. “certificate of formation” in Delaware), which is a simple document notifying the state of the new LLC and an “Operating Agreement” which is the document in which the members agree on how the LLC will be run. In many states it is possible to form an LLC without also drafting an Operating Agreement, but doing so will result in the LLC being governed by whatever the “default rules” of the state of organization apply. The default rules are embodied in a state’s laws and are often contrary to how the members would like the LLC to run and generally do not outline how disputes between members should be resolved, resulting in simple disagreements between members resulting in the dissolution of the LLC at best or expensive and protracted legal disputes at worst.

An LLC is a great business entity for a small and medium sized businesses or self-funded start-ups, but is not a good option for businesses expecting to seek significant outside investment or anticipating needing to incentivize employees with later vesting ownership in the business as an LLC does not provide the flexibility of ownership options that other business entities provide. For instance, “stock option” type ownership grants are more complicated to implement in an LLC than in a corporation. So, while an LLC is the best choice for many new businesses, it’s not a one-size-fits-all solution. 

As with all business entities, having well drafted organizational documents i.e. operating agreement, bylaws, etc., and following operational best practices can prevent business ending partner disputes and thwart any efforts to pierce the corporate veil (see our article “Piercing the corporate veil - avoid the appearance of evil” for a discussion on that legal principle) and hold members personally liable for the obligations of the company.

Craig WinderLLC, Basics