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.
- Forming an LLC Online: You Get What You Pay For
- Should My LLC Issue Membership Certificates?
- Why does our Operating Agreement have a Spousal Consent?
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.