The Limited Liability Company—Is it Right for Your New Business?

The Limited Liability Company

You’re starting a new business and need to decide which business form to choose. This blog post will discuss the basics of the limited liability company, or LLC.

LLCs are formed by a Company Agreement which set forth whether the LLC will be member- managed or manager-managed, the officers of the company, the membership interests and other internal affairs of the company. Importantly, the Company Agreement can only be amended if each member of the company agrees. This is an important protection for all members. It guarantees, for example, that one day you don’t walk into the office to find out that two other members have removed your voting powers. The Company Agreement should be carefully considered with your lawyer, as this is the governing document for your new business and states your rights as a member of the LLC.

An LLC may be either member-managed or manager-managed. This is established in the Company Agreement, which also may establish other classes of members. Generally, in a member-managed LLC, all members of the company have the same rights and vote on required matters. In a manager-managed LLC, however, some members will be designated as managers and others will remain members. Depending on the Company Agreement, the Managers will run the company and have voting rights. Members will not have voting rights except as outlined in the Texas Business Organizations Code, which includes the above-mentioned protection that the Company Agreement may not be changed without the agreement of all members.

One distinguishing feature of LLCs is how voting is handled. Each member receives one vote, regardless of his or her ownership interest. For example, in a member-managed LLC, the ownership interests may be 50%, 25%, and 25%. Each member would receive one vote. The 50% member’s vote would carry the same weight as the 25% owner.

As a member of an LLC, it is important to note that unless otherwise addressed in the Company Agreement, you may not withdraw from the Company and your fellow members may not expel you from the Company. However, you may sell your interest to another member or may even assign your membership interest to another, in accordance with the Company Agreement. The Company Agreement may provide for certain events in which your membership interest must be offered for sale back to the Company and/or its members, such as termination of your employment.

An important protection under the statute shields members and managers from company liability. In other words, members or managers are not liable for company debt.

What about financial contributions? Who puts up the money? A financial contribution is not required to become a member of an LLC. However, if you have a signed agreement in which you to make a contribution, that agreement is enforceable against you. The Company Agreement, once again, may treat this obligation differently. But, to release the obligation entirely, all the members of the company must agree.

In this brief introduction to LLCs, it is apparent that the Company Agreement is an important foundation document when forming an LLC. An LLC is a company form that allows different classes of membership, voting privileges and protection for members against company liabilities.