Common LLC Terms

Common LLC Terms

Before forming an LLC, you should be familiar with these common terms used when discussing LLCs.

Member

A member is a person who owns an interest in a limited liability company. Unless the articles of organization provide otherwise, the members also manage the LLC.

Managing Member

A managing member is a member of the LLC who runs the operations. If all of the members do not want to manage the LLC, then one or more of them can be designated a managing member.

Manager

A manager is a person who is not a member of the LLC but runs the business. This is done when the members of the LLC want a nonmember to run the operations.

Registered Agent and Registered Office

The registered agent is the person designated by a limited liability company to receive legal papers that are served on the company. The registered agent should be regularly available at the registered office of the company.The registered office can be the company's offices or the office of another person who is the registered agent. The registered agent receives court papers and forwards them to the members of the LLC.

Articles of Organization

The articles of organization, also referred to as a certificate of organization in some states, is the document that is filed with the Secretary of State to start the limited liability company. In most cases, it legally needs to contain only a few basic statements.

Operating Agreement

The operating agreement is the document that includes the rules and regulations for the management of the company. Even single-member LLCs should have one, but they are especially important for multiple-member LLCs because they spell out the rights of the parties if they have a disagreement.

Ownership Percentages

LLC ownership can be expressed in two ways: (1) by percentage; and (2) by membership units, which are similar to shares of stock in a corporation. In either case, ownership confers the right to vote and the right to share in profits.

Unlike a corporation, an LLC can distribute its ownership interests as it pleases, without regard to how much money or property a member contributes to the company. For example, if Sam contributes $10,000 to the company and is a silent partner, and Rick contributes no money, but runs the company on a daily basis, they could still decide to split the membership interests 50%-50%.

An LLC can also be organized with different classes of ownership interests, which provide flexibility for special allocations of profits and voting power.

For example, you can create a special class of "super-voting" units that provide 10 votes per unit or pay a certain level of profit before the "regular" units.

The sale of membership interests is subject to federal and state securities laws. Generally, though, if you are not advertising the sale and are dealing only with a small number of investors (less than 35), then you will be exempt from most of the regulations. If, however, you are seeking to raise a significant amount of money from a large number of investors, it will be necessary to consult an attorney.