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Friday, April 15, 2016

Your New LLC - Part 1: The Basics

As an attorney who helps businesses of all sorts, and being with a Firm which has business law clients throughout South Carolina and North Carolina (as well as in a few other states), I frequently find myself providing legal consultations and ongoing advice regarding forming a new business entity and properly maintaining that business organization. This is the first in a series of blog posts which shares some of that knowledge, specifically with regard to limited liability companies.

Starting a new business comes with a lot of financial decisions and obligations. However, there are also many legal considerations that need to be addressed at the outset of starting a new business. Probably the most important legal decision, and certainly one of the first ones that needs to be made, is whether to form a business entity and, if so, what kind. The answer to the first part of this question is clear in the vast majority of situations – you should definitely create a separate business entity to run your business. As to the second part of the question, it seems clear that most new businesses in this day and age choose to operate through a legal business entity known as a limited liability company or “LLC”. LLCs provide a great deal of flexibility for new business owners and do away with many of the corporate formalities required by more traditional business entity options like corporations, while still providing the main benefit to the use of a business entity – limited liability protection. For example, the requirement to have annual meetings, bylaws, and written meeting minutes typically associated with corporations, can be forgone if you use the LLC structure. LLCs are now available options in all 50 States and are typically formed by filing Articles of Organization with the regulating body of the state. In many States, like South Carolina and North Carolina, that regulating body is the Secretary of State’s Office or Department. In South Carolina the fee for filing the Articles of Organization, or to “create” the LLC, is $110.00 (it is $125.00 in North Carolina). This is a one-time fee in South Carolina and there are no annual fees like most states, including North Carolina. But the decision of in which state to form your LLC should be made based on a number of factors – not just cost. For example, if you live in North Carolina but do business in both Carolinas, there may be other benefits or limitations that make it worthwhile to choose one over the other.

Completing the Articles of Organization can vary a little from state-to-state, but generally includes providing the following basic information: (1) the name of the LLC; (2) the “registered agent” and office for the LLC; and (3) the names of the “organizers” of the LLC. The name typically must include “LLC” or “Limited Liability Company” or some similar designation in it (check with the Secretary of State / Division of Corporations in your state for specifics). It is important to note that with regard to the name itself, forming the LLC only means that no other LLC in your state can use the same exact name – it does not, however, provide any exclusive right or protection to use the name with respect to any product or service. This is done through the actual use of the name in your trade and/or the filing of trademarks and other intellectual property rights (this topic can be rather complex and is deserving of its own article, but see this link for some basic information.  The “registered agent” is a person or entity that is authorized to accept official notices and mail on behalf of the LLC within the state, but need not be an owner or employee of the LLC. Often times LLCs opt to use outside entities, such as registered agent services or their lawyers, in whole or in part to better maintain the anonymity of the owners, or “members,” of the LLC (as further discussed below). This typically involves a fee and can add to the expenses of the LLC, so if anonymity of the members is not necessary or beneficial to you, then you may choose to use yourself or someone else associated with the LLC as the registered agent. The “organizer(s)” of the LLC is the person or entity that is actually filing the Articles of Organization and, like the registered agent, need not be the owner(s)/member(s) of the LLC. For example, our law firm usually acts as the organizer of our clients’ LLCs either to further the goal of anonymity or to make the creation process more efficient (the organizer must sign the Articles of Organization in most cases), or both. South Carolina also requires that the LLC identify a business address in South Carolina. This is fairly unique in relation to most other states and can make forming a South Carolina LLC more difficult or a less attractive option for out-of-state owners if they do not maintain an address in South Carolina.

One piece of information that is not required to be provided in the Articles of Organization in many states, including the Carolinas, and that often surprises many new business owners, is the names of the owners, or members, of the LLC. Members are akin to shareholders or stockholders in a corporation or the partners in a partnership, and need not be individuals – they can be other business entities such as corporations and even other LLCs. Not having to identify the members in the Articles of Organization can be very beneficial if the owners of the business do not want to be listed on the public records of the Secretary of State. This may be the case for a number of reasons including, without limitation, for asset protection purposes.

Once your LLC is formed, it is extremely important to have a governing document, known as an operating agreement, to set out the rules and details of the LLC and the relationship among the members. In subsequent posts we will discuss the operating agreement in detail and provide information on other LLC matters, including Federal, State and local business licensing and permitting considerations, so stay tuned!