Can I Form an LLC without a Lawyer?

Recently, several start-up entrepreneurs have asked me whether they can form a limited liability company (LLC) without a lawyer’s assistance. The following answer reflects practices in California.

The first step, filing Articles of Organization with the Secretary of State, is easy – no lawyer is required (unless you want expedited turnaround, in which case a lawyer who has an existing relationship with a commercial filing service in Sacramento is invaluable).

The second step is to prepare the Operating Agreement for the LLC. The Operating Agreement has a role similar to the roles of both bylaws and shareholder / voting rights agreements for a corporation: It provides the rules by which the LLC will be managed and operated, and it specifies the members’ (owners’) respective economic interests and voting rights.

If you will be forming a single-member LLC, a simple operating agreement from a commercial source may well suffice – you probably will be able to put it in a drawer and pretty much ignore it thereafter. Your most important operational issues will be to sign contracts in the LLC’s name and to keep the LLC’s bank account and financial records separate from your personal bank account and financial records. (See Beware Your Alter Ego.)

If you intend to use a commercial source – perhaps because you need to keep expenditures to a minimum – you should seriously consider obtaining a book and the accompanying form documents from Nolo rather than using an online LLC-formation service. The reason: You will spend less money, yet by reading the book, you will learn a lot about forming and maintaining your LLC properly. With an online service, you are likely to learn nothing, and you may well end up with an inferior Operating Agreement.

If you will be forming a multi-member LLC, however, the Operating Agreement is incredibly important. In my experience, there are two critical areas where a lawyer’s assistance is essential if you want to avoid problems down the road.

First, it is necessary to identify the manager(s) and specify what the manager(s) can and cannot do without member approval. And, where member approval is required, the Operating Agreement must specify, for each type of action, whether majority, super-majority or unanimous approval is required.

Second, the Operating Agreement must address procedures for, and any restrictions on, transfers of membership interests. Frequently, transfers to outsiders are prohibited because co-founders will be uncomfortable, at best, if one of the founders transfers his/her membership interest to a third party. If transfers are not prohibited, there usually are procedures by which the LLC and/or the other members have a right of first refusal to purchase the selling member’s interest on the same terms as the bona fide offer from the third party.

It is close to impossible for non-lawyers to do a proper job of drafting Operating Agreement provisions in these two areas.

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This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

14 comments

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  3. Martin says:

    Dana,

    this has been very helpful. But what if you are a non-US citizen that temporarily resides in the US?

    If I wanted to get a LLC myself (no other owners), can I do business in the name of that company in the US without a separate visa for the LLC?

  4. anon says:

    I think what Martin might be referring to is the requirement that only the “C” corporate structure is acceptable if the corporation is to be owned wholly or in part by foreign nationals.

    (At least, that’s my understanding.)

  5. Dana says:

    @anon
    Thanks for the interpretation.

    While it is true that foreign nationals cannot be shareholders of an S corporation, that restriction does not apply to membership in an LLC.

  6. [...] a year ago, I suggested (in Can I form an LLC without a lawyer?) that entrepreneurs seeking to save money when forming a limited liability company would be better [...]

  7. hk says:

    Dana,

    First of all, thanks for all the helpful information you have provided.

    My question on LLC ownership is also related to foreign nationals, one current working in the U.S. under working visa, another lives and works in a foreign country. If these two form a CA LLC, the profit/loss will be passed through to the two owners. Does that violate the “passive” nature of foreign national owned business? Can the LLC pay consulting fee to the owner without violate the “passive” requirement?

    Thanks.
    HK

  8. Dana says:

    @hk
    The issue is not whether or how the member receives money from the LLC – the issue is whether s/he does work for it. Please see “Visa Basics for Foreign Entrepreneurs, Part 2: What Constitutes Work?” at http://danashultz.com/blog/2011/01/18/visa-basics-for-foreign-entrepreneurs-part-2-what-constitutes-work/.

  9. Claudia says:

    Hi Dana. Thank you for your very informative posts. I was wondering if you had an opinion on why different lawyers can have extremely different fees for forming an LLC? I’ve seen anything from $1000 to $3000 (in the SF bay area) for the same set of services, and the fees don’t necessarily seem to correspond to the experience or reputation of the lawyer, and I am slightly puzzled by this. Is there a too-cheap/too-expensive limit at which we should be suspicious?

  10. Dana says:

    @Claudia
    I don’t know the characteristics of the lawyers who provided the quoted fees (mine is toward the middle of that range), so I can only guess.

    At the low end, either (a) the lawyer might be desperate for business and, thus, is charging only a bit more than an online service, or (b) the fee might not include out-of-pocket costs, such as filing fees.

    At the high end, either (a) the lawyer might have a lot of business and needs a financial incentive to take on more work, or (b) the lawyer isn’t too eager to work on that particular matter. (I once was contacted by out-of-state founders who, I could tell, wanted to get by cheaply, so I wasn’t interested. I quoted $5,000 – and never heard back from them.)