Key Takeaways

  • A term company LLC has a set duration of existence (e.g., 25 years) stated in its formation documents, whereas an at-will LLC continues indefinitely until members choose to dissolve it.
  • LLCs offer personal liability protection, pass-through taxation, and operational flexibility, but they may be less appealing to investors and harder to convert to other structures.
  • Forming an LLC involves choosing a name, filing Articles of Organization, and often creating an operating agreement to define management and continuity rules.
  • A term company LLC can transition to an at-will LLC when its term expires, allowing operations to continue with member approval.
  • Understanding the differences in management, tax treatment, and continuity is crucial when deciding whether to form a term or at-will LLC.

Term and At-Will Limited Liability Companies

At the beginning of formation, the owners of a term LLC can designate a term of 25 years in its articles of incorporation. The business will exist for that length of time.

At the end of the 25-year period, one of two things will occur: the LLC will cease operating or the company will continue doing business on an at-will basis. If a member (also referred to as an owner) chooses to disassociate themselves from the LLC or withdraw as a member of the business while a term LLC is working with a designated length of existence, it will not impact the company's existence.

When a company chooses to operate at-will, it does not specify a designated term of existence. The LLC will operate indefinitely. Unlike a term company, if a member of the limited liability company disassociates themselves, the LLC will be dissolved. This can be avoided if a percentage of the remaining members agree to the continuation of the company. The LLC's operating agreement should specify what the percentage of members must be to continue at-will in this situation.

Benefits and Considerations of a Term Company LLC

A term company LLC can be a strategic choice for businesses with finite objectives or planned exit strategies. Common reasons for forming a term LLC include real estate development projects, joint ventures, or enterprises that are expected to wind down after a defined period. Key considerations include:

  • Predictable Lifecycle: The LLC automatically dissolves or transitions to at-will status at the end of the term, which is useful for projects with clear timelines.
  • Reduced Member Disruption: Member withdrawals do not automatically trigger dissolution during the set term, providing stability to the business.
  • Exit and Tax Planning: The set duration allows members to anticipate dissolution events and plan for capital gains or losses.
  • Limitations: A term LLC may need to amend its formation documents to extend its life, which could involve additional state filing fees.

Businesses seeking ongoing operations or future investor involvement may prefer an at-will LLC for greater flexibility.

About Limited Liability Companies

Starting a limited liability company is on the rise because an LLC is an easy-to-run entity that provides personal liability protection. An LLC offers several other advantages, as well.

One major benefit of an LLC is the tax process. The LLC pays no taxes. Rather, the owners pay taxes based on their ownership percentage of the LLC's profits and their individual tax bracket. This process prevents double taxation. Other advantages to forming an LLC include:

  • LLC owners do not have any residency restrictions. Corporations do have this restriction.
  • Owners have more flexibility in terms of profit sharing.
  • An LLC has less frequent operational formalities compared to corporations.

An LLC may not be the best business structure for your business. It is recommended that you consult with a lawyer who has specialized knowledge of limited liability companies to help guide you in making the right choice when selecting a business structure.

LLCs are fantastic in many ways, but there are also several disadvantages to this structure. For example:

  • Bringing in outside investors is not an option with an LLC.
  • Generally, any stock options offered to employees will not come with the same tax advantages as a corporation.
  • It is next to impossible to go public with an LLC.
  • Some investors, such as venture capitalists, do not allow investments in an LLC.
  • Converting the LLC to another business structure at a future date can be difficult and expensive.

How Term and At-Will LLCs Affect Management and Liability

Whether an LLC is term or at-will, members receive limited liability protection, meaning personal assets are generally shielded from business debts and obligations. However, management and continuity differ:

  • Management Options:
    • Member-managed: All owners participate in daily operations.
    • Manager-managed: Owners appoint one or more managers to run the LLC, which can simplify decision-making for larger groups or passive investors.
  • Continuity and Liability:
    • A term LLC offers continuity during its stated lifespan regardless of member withdrawals.
    • An at-will LLC could dissolve if a member exits, unless the operating agreement or remaining members vote to continue.

These distinctions are critical for companies balancing operational stability with the desire for flexibility and investor appeal.

Starting a Limited Liability Company

There are certain steps to take when starting an LLC. Depending on the type of business you will be operating and its location, the following requirements may be different for your state:

  1. Choose a name for the business. Most states require that a variation of "limited liability company" be included in the name. This can be something like "Limited Liability Co." or "LLC."
  2. Search your state's name database, which can usually be found at the Secretary of State's website, to confirm that the name you have chosen is available. Also, check for names that may be too similar to yours.
  3. Register the LLC name as a "fictitious business name" with the appropriate agency for your area.
  4. Create an operating agreement. Sign and date it.
  5. Write the Articles of Organization for your LLC.
  6. File the Articles of Organization with the office of the Secretary of State.
  7. Obtain the necessary permits and licenses for the LLC. Depending on your business type, you may need both local and federal permits.

Converting Between Term and At-Will LLCs

In some cases, businesses may want to change the LLC’s duration as their plans evolve:

  1. Term to At-Will: When the initial term expires, members can vote to continue the business indefinitely. Filing an amendment with the Secretary of State may be required in some states.
  2. At-Will to Term: If the business later identifies a finite project or exit plan, members can adopt a specific term through an amendment to the Articles of Organization.

Before converting, consult a legal professional to ensure compliance with state laws and the operating agreement, as some conversions can trigger tax implications or require unanimous member approval.

Limited Liability Operating Agreement

An important aspect of an LLC is its operating agreement. Within the operating agreement, you will outline the management methods and rules to be applied to the company. An operating agreement is not required in all states. However, it is recommended that you create an operating agreement even if your state does not require it. Otherwise, your LLC will be subject to the default rules and regulations that your state imposes.

Importance of a Customized Operating Agreement

For both term and at-will LLCs, the operating agreement is the cornerstone of governance. A well-drafted agreement should:

  • Specify duration (term or at-will) and the conditions for dissolution or continuation.
  • Outline member contributions, profit-sharing arrangements, and voting requirements.
  • Address procedures for member withdrawal and whether the LLC continues automatically or requires a vote.
  • Include buyout provisions and dispute resolution mechanisms to avoid legal conflicts.

Having clear terms in the operating agreement reduces the risk of unintended dissolution and ensures smooth transitions if the LLC changes its term status.

Frequently Asked Questions

1. What is a term company LLC? A term company LLC is a limited liability company with a set duration of existence stated in its Articles of Organization, often used for projects with a defined end date.

2. How does a term LLC differ from an at-will LLC? A term LLC has a predetermined lifespan, while an at-will LLC continues indefinitely until members choose to dissolve it.

3. Can a term LLC convert to an at-will LLC? Yes, members can vote to continue the LLC after its term expires, often by filing an amendment with the state.

4. Do member withdrawals dissolve a term LLC? No, a term LLC generally continues until the end of its stated term, even if a member leaves, unless the operating agreement states otherwise.

5. Why would someone choose a term LLC? Businesses often select a term LLC for projects with a clear timeline, such as real estate developments or joint ventures, where a planned end date provides clarity.

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