Forming an LLC usually involves more than filing one document with the state. New business owners may receive an operating agreement, organizational documents, tax forms, ownership schedules, and other paperwork that can quickly start to look like alphabet soup.
On this week’s Tuesday Tax Take, we are keeping things simple and explaining some of the documents commonly used when forming and organizing an LLC. Not every LLC will have every document described below, and the exact names may vary depending on the state and how the business is structured.
Certificate or Articles of Organization
The document filed with the state to legally create an LLC is commonly called a Certificate of Organization or Articles of Organization, depending on the state. This document is usually fairly short and contains basic information about the company, such as its legal name, registered agent, and other information required by the state. Once accepted by the appropriate state filing office, the LLC has generally been formally created.
Operating Agreement
The operating agreement is the LLC's primary internal governing document. While the formation filing creates the company, the operating agreement establishes many of the rules for how the company will actually operate. An operating agreement may address ownership, management authority, voting rights, distributions, transfers of ownership interests, what happens if an owner dies or leaves the business, and how major company decisions are approved. For an LLC with multiple owners, the operating agreement is particularly important because it establishes the rules governing the owners' relationship with one another.
Ownership Schedule
An ownership schedule or similar exhibit may identify the LLC's members and their respective ownership interests. For example, it might show that Taylor owns 60% of the company and Travis owns 40%. Depending on the LLC, the schedule may also identify units, initial capital contributions, or other information relating to ownership. Keeping the ownership schedule current can make it easier to determine who owns the company after new owners are admitted, interests are transferred, or ownership percentages otherwise change.
Subscription or Contribution Agreement
When someone becomes an owner of a company, there may also be a subscription agreement, contribution agreement, or similar document showing what the person is contributing in exchange for the ownership interest. For example, Harry might contribute $50,000 in exchange for a 20% interest in the LLC. The agreement can document the basic terms of that investment and the ownership interest being issued.
EIN and Form SS-4
An Employer Identification Number, or EIN, is a federal tax identification number issued by the Internal Revenue Service. Businesses commonly use an EIN when opening bank accounts, filing tax returns, running payroll, and completing other business and tax matters. The application used to obtain an EIN is Form SS-4. If an attorney, accountant, or other representative is assisting with the EIN application, the client may also be asked to sign an authorization allowing that person to obtain the EIN on the company's behalf. An EIN does not determine who owns the company and does not, by itself, determine how an LLC will be taxed.
Written Consents and Meeting Minutes
LLCs may also maintain written consents, resolutions, or meeting minutes documenting formal company decisions. For example, organizational documents may approve the operating agreement, identify the initial members or managers, authorize bank accounts, or approve other actions taken when the company begins operating. Similar records may be prepared later when the company takes other significant actions. These records help create a history showing what the company approved and who had authority to approve it (see last week’s article for more on these).
Certificates and Good Standing Documents
After an LLC is formed, the state may issue or make available documents confirming the company's existence. Depending on the state, these may be referred to as a Certificate of Organization, Certificate of Existence, Certificate of Good Standing, or similar term. A certificate of good standing or existence is often requested by banks, lenders, buyers, or other parties to confirm that the company exists and is in good standing with the state as of a particular date.
The Takeaway
Each LLC document serves a different purpose. The formation filing creates the company, the operating agreement provides the rules for how it will operate, ownership records identify who owns it, tax documents help establish the company's federal tax identification, and written consents or meeting minutes document important company decisions. Not every LLC will need the same set of documents, but understanding the purpose of each one can make the formation process much less intimidating and help business owners understand what they are actually signing.
This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.
