When you have more than one tech startup founder, you may select to form a Multi-Member Limited Liability Company (LLC). The formation process is marked by the preparation and filing of several key documents, each with its own set of complexities and legal implications.
The birth certificate of an LLC, as it were, is the Articles of Organization. Filed with Secretary of State's office in the jurisdiction the founder's choose, this document formally establishes the LLC. It typically requires basic information, such as the LLC's name, its purpose, the name and address of the registered agent, and the name of the individual filing the document. Colorado, for example, does not require the names of the members of the LLC to be named in the Articles of Organization, whereas other states do require the names of the members to be listed in the Articles of Organization.
Articles of Organization must, by law, be properly filed in each US state in which it operates, and an LLC which does not properly file its articles of Organization may not have standing to sue for harms, even when unrelated to their improper filing.
The Operating Agreement is the guiding instructions for operation and governance of the LLC. It governs how the LLC operates, including member roles and responsibilities, profit and loss allocation, dispute resolution procedures, and procedures for adding or removing members. The Operating Agreement is especially crucial when there is more than one founding member of the company, as competing interests may complicate modifications in the case of improper drafting. Given its pivotal role in guiding member relations, founders should carefully consider the implications of each clause of an Operating Agreement before starting their venture.
While an LLC is generally taxed as a partnership, it has the flexibility to choose to be taxed as a corporation. This election is made by filing IRS Form 8832, "Entity Classification Election," within 75 days of forming the LLC or within 75 days of the beginning of the tax year in which the election is to be effective. Making this election can have significant tax implications, so it should be considered carefully. Some founders may be able to file a Late Election for S Corporation status.
Check out our comprehensive guide to S Corporation elections for LLC startup founders for more information.
Errors or omissions in the formation process can lead to significant legal consequences. For instance, incorrectly drafted Articles of Organization or Operating Agreement can lead to internal disputes, potential loss of limited liability protection, or even involuntary dissolution of the LLC.
Given the intricacies and far-reaching implications of this process, a self-filing of articles of organization and a template of an operating agreement may not cut it. Consult with experienced lawyers to form your LLC. A detailed analysis of your startup's needs and goal scan help navigate this critical decision and prevent potential legal pitfalls.
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