Starting a Limited Liability Company

An LLC is not a corporation or a partnership, but it has elements of these other forms of business organization. An LLC is treated as a corporation for purposes of limited liability and as a partnership, if properly structured, for purposes of taxation. LLC members can fully participate in management decisions, while remaining protected from personal liability. An LLC can be run by a manager or directly by its members. These qualities make LLCs more attractive to some business people as compared to partnerships or subchapter S corporations.

Vermont's LLC law is fairly new. It took effect on July 1, 1996. Since that time, many people in Vermont have opted for the LLC business entity form. An LLC may be formed for any purpose, except to transact business as a bank, savings and loan association, credit union, insurance company, or railroad company. Professionals may use the LLC form instead of a professional corporation, but are also governed by the licensing laws of their profession and the state's professional corporation act.

Like a corporation, the formation of an LLC begins with the filing of a form entitled Articles of Organization. Again like a corporation, filling out the form is not so hard if you understand the nature of the information you are asked to provide. Moreover, just as important as the LLC Articles of Organization is the LLC's operating agreement. The operating agreement is not filed with the Corporations Division, yet it is an extremely significant document because it sets the rules about the ownership, management, and liability of the LLC. In fact, the operating agreement is so important that the LLC Articles of Organization form cannot be completed without first understanding what an operating agreement is all about.

OPERATING AGREEMENT

Every LLC needs an operating agreement, which is a "proprietary" or private, document not filed with the Corporations Division. The agreement regulates the affairs of the company and the conduct of its business, including important matters of governance. By comparison, the LLC Articles of Organization are a public record, and may include details on how the LLC is run, enough to put the world on notice about how to deal with the LLC. By filing the LLC Articles of Organization, an LLC is formed; by entering into an operating agreement, the LLC organizes itself to begin business.

Most of the LLC law is a guide, not a direction on how to run the LLC. This allows flexibility and creativity in organizing the LLC. As a safeguard, the law provides certain provisions that govern every LLC, which may not be changed by the operating agreement. These include rights of members to access books and records, the duty of loyalty or the duty of care of members of the LLC to the company, and the obligation of good faith and fair dealing. Operating agreements may not vary the power of members to withdraw, the right of members to expel another member, or the requirement to wind up business if the LLC Articles specify such an event or in the case of certain judicially recognized events listed in the statutes. An operating agreement may also not restrict certain rights of third parties who are not managers, members or their transferees. Beyond these basic provisions, an operating agreement can allow an LLC to govern itself as it wishes.

In many cases, LLCs will prefer to leave some or all of the details to the statute, since the law provides a default standard. Some organizers prefer to begin by adopting a short operating agreement, perhaps expanding the agreement over time by amendments. No matter what the LLC does, members and managers ought to know what the operating agreement says and they should know what the law says when they develop the agreement so they can decide what works and what may need a different approach.

FORMATION

The LLC Articles of Organization form asks for the name of the LLC, its address, the name and address of its agent and organizers, the duration of its existence (if limited to a specific term), whether the LLC is to be manager-managed or member-managed, and whether the members will be personally liable for the LLC's debts and obligations.

The organizers are the people who form the LLC. Similar to a corporation's incorporators, the organizers are the people who go about forming the entity. The LLC Articles of Organization must be signed by the organizers. A company may have a single organizer, even if it is to have more than one member. Organizers don't need to be members.

The members are the people who own the LLC, similar to the shareholders of a corporation.

The managers are the people who operate the LLC, similar to the corporate officers of a corporation.

There is a filing fee that must accompany the filing of the LLC Articles of Organization. Provided the document conforms to the law, the Corporations Division will accept it for filing, and the date of its filing is the starting date for the life of the company (unless a later date is specified).

CHOOSING AN LLC NAME

As already explained with trade names and corporate names, you can't pick a name already in use in Vermont by a corporation or other business, or one that is deceptively similar to, or likely to be confused with or mistaken for another's name. Similar to the rules regarding corporate names, to distinguish itself as an LLC, the LLC name must use the words "limited liability company," "limited company," "LLC," "L.L.C.," "LC," or "L.C." in its name. "Company" or "Limited" may be abbreviated as "Co." or "Ltd."

LLC names may be reserved, to protect a name prior to the organization of the company, for a period of 120 days, and this reservation is renewable for two successive periods of 120 days. Examples include "Greenacre Limited Liability Company" or "Blackacre LLC".

Like a corporation, an LLC could also do business under a trade name. The LLC would be formed under its LLC name and then complete a trade name application to do business under an available trade name.

PROCESS AGENT

Like a corporation's registered agent, the LLC process agent accepts service for the LLC. If the LLC is sued, then the lawsuit papers are served or delivered to the process agent at the designated office. Any Vermont resident or any legally registered corporation in Vermont may be designated as a registered agent; the agent does not have to be a manager or member of the LLC. Each agent must maintain a designated office within the state, but that office need not be the principal place of business of the LLC. It may be the agent's office.

The process agent may resign at any time by filing an original and two copies of a statement of resignation with the Corporations Division, after giving written notice to the LLC. The process agent's official capacity ends on the 31st day after the statement is filed. The LLC must file a statement of change that names the new agent for service of process and contains the new agent's written consent to the appointment.

FISCAL YEAR and ANNUAL REPORT

Same as with corporations, an LLC must file an annual report with the Corporations Division within 2 1/2 months of the end of the fiscal year. That is why the Corporations Division is interested in the LLC's fiscal year. The LLC's fiscal year may have tax implications so we recommend you consult with a professional before you select a fiscal year. Notice will be mailed to your registered agent when the report is due - so make sure you notify corporation's division if this appointment changes.

Filing the report is now done online - either electronically paying with a credit card or printing your own report to mail to us. The cororporation's division makes every effort in getting the notice to you, however we have no control over the postal system and your failure to receive notice is no excuse for late filings and subsequent late fees. When you file the annual report you must keep a copy - if you want one - as the divsion does not return a copy to you.

TERM or AT-WILL LLC

This portion of the form requires that a choice be made between being an at-will LLC or a term LLC. These designations mean the following:

"At-will limited liability company" or "at-will company" means a limited liability company in which the members have not agreed to remain members until the expiration of a term specified in the articles of organization.

"Term limited liability company" means a limited liability company in which its members have agreed to remain members until the expiration of a term specified in the articles of organization.

Whether to be an at-will or term LLC is a significant decision because when an LLC is dissolved there must be a "winding up" of the LLC's activities, which can include the distribution of assets and the settling of debts. This can have significant tax implications. Often how long an LLC will exist is related to the type of business the LLC is engaged in. For example, an LLC that is being formed to own and operate real estate may be a term LLC because the plan is to sell the asset after a set number of years. In contrast, an LLC may be formed to own and operate a business such as a store or a restaurant for an indefinite period of time.

MANAGER-MANAGED LLC

This part of the LLC Articles of Organization requires that the organizers decide who will be responsible for the management of the LLC, as compared to who are the owners of the LLC. Just as it sounds, a manager-managed company acts through its manager and a member-managed company acts through any member. Acts of a manager bind the LLC in manager-managed LLCs and acts of a member bind the LLC in member-managed LLCs. The LLC Articles of Organization and the LLC's operating agreement may vary this rule, however.

The liability of members depends on the LLC Articles or Organization. The Articles may specify whether the members of the company will be liable for all or for specified debts, obligations, or liabilities of the company. If the articles are silent on that question, then the LLC absorbs all liability, leaving members not personally liable for the acts or conduct of the company.

In a member-managed company, each member has equal rights to manage and conduct the business. It takes a majority of members, however, to act in most instances. Consensus of the members is required to amend the operating agreement or articles, to make interim distributions of profits or losses, to admit new members, or to sell all or substantially all of the property of the company.

In a manager-managed company, the manager has exclusive authority to manage and conduct the business. The members appoint or elect and remove or replace the manager by majority vote.

OTHER ISSUES RELATED TO BEING A MEMBER

Members usually qualify to become members by making a contribution. This might be money, other property, promissory notes, or services to the LLC. Once you agree to contribute, you are obliged to do so and if you fail to perform, the company or any creditor has a right to enforce that obligation, and may collect money from you even if you promised services or other property.

LLC members enjoy the right to a share of the LLC's profits in proportion to the amount of their contribution. They are obliged to bear a proportionate share of the losses of the company, up to the amount of their contribution. The law defines when distributions can and can't be made.

In either manager-managed or member-managed LLCs, every member has access to information and documents relating to the LLC. Members have a right to learn the status of the LLC and its financial condition. Members have a right to copies of tax returns and financial statements, a current list of the names and addresses of other members and managers, and the current articles and operating agreement. A member is also entitled to information about the amount of cash and other property or services contributed or promised, and the date on which each member became a member. The company may impose a reasonable charge for providing this information and may set reasonable standards as to when and where it will provide the information. The company may also set reasonable standards as to what information and documents are to be furnished. Requests must be in writing, made in good faith and for a legitimate business purpose.

DISSOLVING A LIMITED LIABILITY COMPANY

To dissolve or "terminate" the company you only need to complete the "LLC dissolution/termination form" with filing fee. If you choose to use your own form infomation needed is listed below.

1. The name of the company.
2. The date of the dissolution.
3. That the business has been wound up and the legal existence of the company has been terminated.
4. Form must be signed either by: (1) manager of a manager-managed company; (2) member of a member-managed company; (3) person organizing the company, if the company has not been formed; or (4) if the company is in the hands of a receiver, trustee or other court-appointed fiduciary. Mail the complete form with the statutory filing fee to the Secretary of State.