Understanding the key terms you will encounter as an LLC member (owner, but we’ll get to that shortly) will make it easier to navigate the legal and operational aspects of your business. In this post, we’ll break down some essential LLC terminology in simple, professional key terms to help you feel confident about setting up, managing, and growing your LLC. Whether you’re just forming your company or looking to expand your knowledge, these foundational terms are a great place to start.
Members
Members of the LLC are the owners.
Members typically have the right to participate in the management and decision-making of the LLC unless the LLC is structured to have managers who handle day-to-day operations.
If the members are managing the day to day operations, the LLC is considered “member-managed”.
Manager
A manager of an LLC is an individual or entity appointed to handle the day-to-day operations and decision-making on behalf of the LLC.
In a “manager-managed” LLC, the manager oversees business activities, makes operational decisions, and may have authority to sign contracts or handle financial matters. This structure allows the LLC’s members to take a more hands-off role, focusing on ownership rather than daily management.
Operating Agreement
An operating agreement is a legal document that outlines the ownership and internal operating procedures of a business, usually an LLC (Limited Liability Company). It’s essentially a blueprint for how the business will be run. The agreement covers important details, like each owner’s roles and responsibilities, profit and loss distribution, decision-making processes, and what happens if an owner wants to leave or if new members join.
While not always legally required, an operating agreement helps clarify expectations and can prevent misunderstandings among owners. It’s also useful for proving the business’s legitimacy in situations like opening a bank account or getting loans. Most of the key terms listed here will be present in the operating agreement.
Articles of Organization
Articles of Organization is a legal document filed with the state to formally establish a Limited Liability Company (LLC). You can think of this document as the birth certificate for your LLC.
It includes basic details about the LLC, such as its name, purpose, address, and the identities of its members or managers. Filing this document creates a legal entity that is separate from its owners, giving the LLC the authority to conduct business in the state.
This article has different names in different states. Some alternative names for the Articles of Organization include Certificate of Organization, Articles of Organization, or Certificate of Formation.
Registered Agent
A registered agent is a designated individual or business entity authorized to receive legal documents, government notices, and official correspondence on behalf of your LLC. All states require LLCs to have and maintain a registered agent, though you are typically allowed to be your own registered agent if you so choose.
The registered agent must have a physical address in the state where the business is registered and be available during regular business hours (this is typically where LLCs that are operating as the members “side hustle” are unable to meet the requirement of a registered agent and must hire one).
A registered agent must ensure that important documents are received and handled promptly. This role is essential for ensuring that a business stays compliant with state regulations and can respond to legal matters in a timely manner.
Annual Report
An LLC annual report is a document that a Limited Liability Company (LLC) files with the state they are registered in to confirm its basic information.
This report usually includes details like the LLC’s name, address, registered agent, and names of members or managers. The purpose of the annual report is to keep the state’s records current and ensure the LLC remains in good standing to operate legally. Annual report requirements vary by state but is typically required by law, and missing the deadline can result in penalties or loss of the LLC’s good standing status.
Franchise Tax
Franchise tax is a fee that some states require LLCs to pay for the privilege of operating within the state. Despite its name, it is not a tax on franchising; instead, it’s essentially a business maintenance fee.
The amount can vary based on factors like the LLC’s income, assets, or a flat rate set by the state. Paying the franchise tax helps ensure the LLC stays in good standing with the state, maintaining its right to operate legally. Failure to pay can lead to penalties or loss of legal status for the LLC.
States have different due dates for franchise taxes, with some having a set due date for all LLCs in the state, while others will have an annual fee on the anniversary of the company’s formation.
Dissolution
Dissolution is the process of formally closing down an LLC, ending its legal existence. This involves filing a document, often called Articles of Dissolution or a Certificate of Dissolution, with the state. While we hope you’ll never need to use this key term, it’s important to understand how to properly close your LLC if you no longer need it.
Once dissolved, the LLC is no longer authorized to operate, and its obligations, like paying taxes and filing annual reports, are concluded. Dissolution may be voluntary, initiated by the LLC’s members, or involuntary if the state forces it due to non-compliance with regulations. The process typically includes settling debts, distributing any remaining assets, and ensuring that all legal and financial matters are resolved.
We hope this helped you understand the key terms you need to know to properly run your LLC. If you have any questions, feel free to give us a call at (800) 506-3279 or contact us here.