Early-stage companies look to the LLC form of business entity
A limited liability company (LLC) is a “pass-through” entity for tax purposes, once properly registered with the IRS, and is the preferred form of business entity for many small and mid-size companies.
Forming an LLC in Maryland is a straightforward process. A person authorized to do so by those persons forming an LLC files signed articles of organization with the Maryland Department of Assessments and Taxation (SDAT). Articles of organization in Maryland need only contain the name of the new LLC, the address of its principal office in Maryland, and the name and address of its resident agent. Articles of organization may also include other provisions, as long as they are not inconsistent with law. For example, articles of organization can provide that the authority of individual members to act for the LLC, solely by virtue of their being members of the LLC, is limited.
Although establishing a Maryland LLC by the filing of articles of organization is relatively easy, one of the advantages of using the LLC form of business entity is flexibility in structuring governance of the entity. The “ground rules” for operating a particular LLC are set forth in the LLC’s operating agreement – a document that plays a role similar to that of bylaws for a corporation. Maryland law does not even require an LLC to have an operating agreement, but any LLC having more than a single member should have a well-drafted and thoroughly considered operating agreement. (In some cases, single-member LLCs should have a written operating agreement, as well). Working with an experienced attorney to draft the right operating agreement for an LLC is a sound investment. Lawyers that have practiced in this area for any length of time will have stories of inadequate operating agreements that clients pulled together informally, or using ill-fitting examples found on the internet, to the later regret of the LLC’s members. Creating a solid, written operating agreement for an LLC, especially at or near the time of its formation, can head off a lot of problems later.
The subjects that can be covered in a written operating agreement are too numerous to be addressed in this article, but one significant matter to be included in an operating agreement for a multi-member LLC is the designation and powers of a “manager” for the LLC. Unless otherwise provided in an operating agreement, each member of a Maryland LLC would have the power to bind the LLC in the ordinary conduct of its business. Unless the articles of organization place limits on the authority of members to act for the LLC, each member of a Maryland LLC has apparent authority to execute any document in the name of the LLC. Instead of operating under these default arrangements, members of a Maryland LLC will wish to clearly designate, in a written operating agreement, who is to serve as the manager of the LLC and provide clear delineation of the manager’s authority to act for the LLC, along with the limits on that authority.
Unlike LLC statutes in other states, the Maryland LLC Act does not use the term “manager.” The Act does not establish statutory duties or a standard of care for members, managers, or other agents of a Maryland LLC, but court decisions during the past ten years suggest that a manager of a Maryland LLC owes the LLC, and its members, the common law duties of an agent. Courts have further suggested that this imposition, by default, of agency liability on managers can be altered or expanded by the LLC’s operating agreement. Another reason to have a written operating agreement, therefore, is to expand, alter, or clarify the manager’s duties to other members.
There are many good reasons for early-stage and other companies to seriously consider choosing an LLC as a legal entity. Forming an LLC in Maryland is relatively easy, but thinking through whether the company should have a written operating agreement, and the terms of any operating agreement, is an exercise in which an experienced business attorney will add real value.