Documents Necessary when Forming an LLC | BizTaxBuzz byTrevor Crow

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17thSeptemberDocuments Necessary when Forming an LLC

Posted by Trevor Crow

It’s no secret that limited liability companies (LLCs) are a very popular form ofentity. I’ve noticed, however, that many people misunderstand the documents necessary when forming an LLC. So,what documents are necessary? Well, the lawyer answer is of course that it depends on the purpose of the entity andwhether it is going to be a Single-Member LLC or a Multi-Member LLC.

One document is absolutely necessary: Articles of Organization. Colorado (and I believe all other states) requires abusiness to file Articles of Organization with the Secretary of State to form an LLC. However, this is usually a bare bonesdocument that provides for the name of the LLC, principal business address, name and address of the registered agent,whether the LLC is manager-managed or member-managed, and the name of the person causing the articles oforganization to be filed with the secretary of state. Besides the Articles of Organization, the other documents that an LLCshould have will vary.

This post provides a few general ideas about documents that you may need when forming either a Single Member LLCor a Multi-Member LLC.

Single Member LLCs

Initially, as mentioned above, a single member LLC (“SMLLC”) will need to file articles of organization to create the entityunder state law. Many attorneys will recommend that the Articles of Organization is the only document that the SMLLCneeds. If a SMLLC is on a shoestring budget, then I think just the Articles of Organization will work, provided thecompany follows business formalities, such as having a business bank account and keeping business assets andliabilities separate from personal assets and liabilities.

To make the importance of following business formalities more real for the business owner, I typically recommend thatthe SMLLC have an operating agreement that addresses governance policies, succession, death and disability. Byfollowing the written policies in an operating agreement, I believe the business owner will have a better argument that theliability protections available to LLCs should be upheld if challenged in court.

Multi-Member LLCs

When an LLC has more than one member, it is essential to have a written operating agreement to memorialize theagreement between the parties. The operating agreement should address the rules and policies that govern the entity,including topics such as management/decision making, voting rights, distributions, allocations, employment, sale ofinterests, tax issues, liquidation, dispute resolution, death and disability and many others.

An operating agreement may be sufficient for most LLCs. However, the members of an LLC may also want any or all ofthe following agreements:

Buy-Sell Agreement – the purpose of a buy-sell agreement is to ensure continuity of ownership and prevent unwantedparties from becoming owners.

Non-Compete Agreement – this agreement prohibits the owners from leaving and starting a competing business for aperiod of time that must be reasonable in time and geographic scope.

Confidentiality Agreement – this agreement may be incorporated in the operating agreement or in a separateagreement. It basically states that all of the company’s proprietary information, such as customer lists etc. will be keptconfidential.

Intellectual Property Agreement – if the company has important intellectual property to protect, it should haveagreements with employees and contractors that make it clear that the company owns any IP created for or used in thebusiness.

Employment Contracts – as the company grows and gets more employees and management personnel it may needagreements governing the terms of their employment.

Bottom Line: the documents necessary when forming an LLC will vary depending on the LLC’s business and thesedocuments become more important and greater in number if it’s a Multi-Member LLC.