Key Takeaways

  • LLC terms describe the essential concepts, roles, and documents involved in forming and operating a limited liability company.
  • Knowing common LLC terms such as “member,” “managing member,” “registered agent,” and “articles of organization” is essential for compliance and smooth operations.
  • Additional terms like “operating agreement,” “capital contribution,” “distributions,” and “dissolution” define financial, management, and exit procedures.
  • LLC laws vary by state, so definitions and requirements for these terms may differ depending on jurisdiction.
  • Understanding LLC terms helps business owners make informed decisions about structure, taxation, and governance.

Understanding LLC terms makes it easier to set up the limited liability company structure, which is a hybrid of the corporation and partnership business entities. It is a popular option for business owners who want to take advantage of the benefits of both formations.

What Is an LLC?

Business owners can form LLCs in most states, combining benefits such as pass-through taxation and limited personal liability. These were previously only available through the formation of an S corporation. On the legal side, LLC formation is less complex than that of a corporation. Therefore, business owners that don't want the restrictions of an S corporation can form an LLC to get many of the same benefits. Limited liability companies are easier to set up and manage than corporations, so many small business owners are opting for this business formation.

The first LLC was formed in 1977 in Wyoming, so it's a fairly new structure. Many of the other states didn't follow in Wyoming's tracks until the 1990s. Thus, the laws around this formation are relatively new and haven't been well-interpreted in court cases. States also have their own statutes that govern and regulate LLCs, which vary between states. Laws that are still being modified and adapted can be difficult for business owners operating in multiple states to learn and keep up with.

Any business owner who is considering forming an LLC should consult with tax and legal advisors who are knowledgeable and up-to-date with the latest laws and rules.

Advantages and Disadvantages of an LLC

An LLC offers business owners a combination of liability protection and operational flexibility. Key advantages include:

  • Limited liability protection: Members are generally not personally responsible for the company’s debts or legal obligations.
  • Pass-through taxation: Profits and losses pass directly to members’ personal tax returns, avoiding double taxation.
  • Flexible management: Members can manage the business themselves or appoint managers.
  • Fewer compliance requirements: Compared to corporations, LLCs typically face less paperwork and fewer ongoing formalities.

However, there are potential drawbacks:

  • Self-employment taxes: In many cases, members pay self-employment tax on their share of the profits.
  • Varied state rules: Regulations and fees differ from state to state, which can complicate multi-state operations.
  • Limited growth options: LLCs cannot issue stock, which may limit fundraising opportunities.

Naming an LLC

Before you can form an LLC, you must reserve the name you want for the company with the local government agency, which is often the Secretary of State's office. You must also follow these naming rules:

  • In many states, you must include the phrase “limited liability company” or its abbreviation, LLC, within the name of your business.
  • Other states might prefer the use of “limited company” or the abbreviation LC.
  • In every state, a rule exists restricting LLC names from being too similar to other businesses registered in the state. This applies to most business formations, including other LLCs, partnerships, corporations, and sole proprietorships.

Additional Naming Considerations

When selecting an LLC name, business owners should also consider:

  • Trademark conflicts: Even if a name is available in your state, it could infringe on an existing federal trademark. A trademark search can prevent costly disputes.
  • Domain availability: Secure a matching website domain early to maintain brand consistency.
  • Name reservation: Some states allow or require reserving your chosen name for a period before filing formation documents.
  • Restricted words: Certain terms like “bank,” “insurance,” or “trust” may require special approval from regulatory agencies.

Common LLC Terms

Member

In an LLC, a member is someone who owns at least some interest in the business. A member or members also manage the LLC's operations, unless otherwise specified in the company's articles of organization. A membership certificate is a document that outlines each member's ownership interest.

Managing Member

A managing member of an LLC is the person who runs the business and oversees its operations. Not all LLCs have a managing member, but when all members don't want to be responsible, they can collectively designate one to manage the business.

Manager

An LLC's manager is someone who has been chosen by the members to run the company. Members can choose to elect a manager if they want someone who isn't a member to run the business operations.

Registered Agent and Registered Office

A registered agent is a person who has been designated by the LLC to accept any legal documents on behalf of the company. The registered agent must be available on a regular basis at the address provided by the LLC when it registered with the state. This address can be the main business office or another address where the registered agent is available, so long as it is within the state where the LLC operates. An LLC's registered agent is responsible for receiving any legal and court documents and forwarding them to the LLC members.

The Articles of Organization

The articles of organization, also called the certificate of formation, is a document that must be completed by the LLC member(s) and filed with the Secretary of State's office. Each state also requires the LLC to pay a filing fee when submitting this document, although the fee varies between states. 

This document must include some basic information about the business, including:

  • Company name.
  • Business address.
  • The registered agent's name and address.
  • A basic description of the type of business the company will conduct.
  • Name(s) of company member(s).
  • Name(s) of company manager(s), if applicable.
  • Date of dissolution (if applicable).

Additional Key LLC Terms

In addition to the terms listed, the following are important for understanding LLC operations:

  • Operating Agreement: A legal document outlining the LLC’s ownership structure, member duties, profit distribution, voting rights, and procedures for resolving disputes. While not always required, it is highly recommended.
  • Capital Contribution: The cash, property, or services that members contribute to the LLC in exchange for their ownership interest.
  • Distributions: Payments of profits from the LLC to its members, as defined in the operating agreement or by state law.
  • Dissolution: The formal process of closing the LLC, which includes notifying creditors, settling debts, distributing remaining assets, and filing dissolution documents with the state.
  • Foreign LLC: An LLC formed in one state but registered to do business in another.
  • Annual Report: A filing many states require to keep the LLC in good standing, typically including updated contact and ownership information.

Frequently Asked Questions

1. What is the most important LLC term to know when starting a business?

The “operating agreement” is one of the most important terms, as it governs ownership, management, and profit distribution.

2. Is an operating agreement legally required?

Not in every state, but having one is strongly recommended to avoid disputes and clarify responsibilities.

3. What’s the difference between a member and a manager?

A member is an owner of the LLC, while a manager is appointed to run daily operations and may or may not be a member.

4. Can an LLC have only one member?

Yes, a single-member LLC is allowed in all states and provides liability protection similar to multi-member LLCs.

5. How often do LLC terms and laws change?

State LLC laws can change regularly. Business owners should review updates annually to ensure compliance.

If you need help with LLC terms, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.