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An LLC Formation Checklist


Forming a new business organization is much more complex than filling out a few "forms."

And it may become even more complex when two or more individuals will form the entity, or if the entity is already conducting business. Not all business entities are the same, or cut from the same mold. But I've found that it is very helpful for my clients to work through a checklist -- it uncovers issues between parties that must be addressed before the entity is formed, not afterwards.

You will find reproduced below the text from my Preformation Checklist for limited liability companies. But you'll also find below the title a link to a PDF file for the Preformation Checklist which includes the "lines" to fill-in the answers for the questions in the Preformation Checklist (it's much easier to negotiate).

This Preformation Checklist addresses many complex issues often incurred when there will be multiple owners of the entity. However, if the new business will only have one owner (or member), some of the questions which follow may not apply.


LIMITED LIABILITY COMPANY PREFORMATION CHECKLIST

[this checklist is reproduced with convenient lines to complete: here>]


1. The three proposed names (in order of preference) for the limited liability company (the "LLC"). Will the LLC conduct its business under an assumed or trade name which will be different than the name of the LLC? If so, the assumed or trade name.

2. The full names and addresses of all the members. The full names of all the members' spouses.

3. Will the LLC have managers, or will the LLC be governed by its members (see also Paragraph 12)? Traditionally, mangers conduct the day to day business of the LLC without the involvement of the members. If the LLC will have managers, list their full names and addresses.

To the extent that the LLC is managed in a form other than by the members, are there matters which should nevertheless be subject to the approval of members (e.g., admission of additional members, incurrence of indebtedness, expenditures of money or contractual commitments in excess of a specified dollar amount, extraordinary transactions, expansions of the nature of its business)?

4. Will the LLC have officers? If so, list their names and the offices held. If so, how are they elected (i.e., consent of 51% of the membership interests; consent of 67% of the membership interests; unanimous consent of 100% of the membership interests)? In addition, what is the scope of their responsibilities?

5. Description of business (the nature of the business together with a description of all the business activities contemplated by the members).

6. Questions for a preexisting business (if the LLC is being formed to carry on an existing business):

(a) Are the properties of such business to be transferred in kind to the LLC?

(b) Are all its licenses, insurance policies, certificates of ownership, etc. to be assigned to the new LLC?

(c) Will the new LLC assume all liabilities of the old business?

(d) Is the new LLC to follow the business practices of the old? Same fiscal period? Same accounting methods?

(e) If necessary, has the formal dissolution of the old business been provided for?

7. Location.

(a) Where will the LLC have its principal place of business?

(b) Will it operate branch offices? Will such offices be in other states?

8. Will the LLC have perpetual existence? If the LLC is to have a definite term rather than perpetual existence, for how long is the LLC to exist?

9. Capital.

(a) What contributions in money or property is each member to make? When is any cash to be paid in?

(b) What is the agreed value of any property contributions? What did it cost the contributing member?

(c) Will any member be making contributions of services or expertise, or other intangible property? How will such contributions be valued?

(d) Is any property being loaned by a member?

(e) What percentage of the LLC is each member to own?

(f) Are the members to leave part of the profits in the business as additional capital?

(g) Which members, if any, will not be required to make capital contributions?

(h) Will there be a procedure for a capital call contribution requiring members to make additional capital contributions? If so, how will the call be determined (i.e., consent of 51% of the membership interests; consent of 67% of the membership interests; unanimous consent of 100% of the membership interests; manager's determination; or a committee's determination)?

(i) Will there be penalty provisions in the event the agreed initial capital contribution is not made, or in the event a required capital call contribution is not made? If so, what will be the penalty (i.e., forfeiture of interest; reduction in percentage of membership interest; or deemed a loan)?

10. Return to Members.

(a) Are any of the members to be able to receive interest on their contribution? To receive a salary? To be able to withdraw profits in advance of the annual accounting?

(b) Will profits and losses be allocated to the members according to their respective percentage of membership interest? Is any member to be guaranteed a certain minimum return?

(c) How is depreciation to be shared on property contributed at a value different from its tax cost? Who is to pay tax on pre-contribution gain, or receive the benefit of pre-contribution loss inherent in contributed property?

(d) Are members to have expense or entertainment accounts?

11. Accounting.

(a) What is each member's individual tax year? What will be the fiscal year of the LLC?

(b) Are the books to be kept on an accrual or cash basis? Will one or more of the members be primarily responsible for the bookkeeping, and if so, what is the name of the member? Will this member also be designated as the "tax matters partner"?

(c) How often are financial statements to be rendered to the members monthly, quarterly, semi-annually, or annually? Is provision to be made for periodic audits by accounting firms?

(d) Are there to be any special provisions for access to the LLC books and records, or any restrictions on access to confidential information of the LLC?

(e) How is the annual profit or loss of the LLC to be calculated?

(f) Are drawing accounts to be established for each member in addition to or in connection with their capital accounts?

(g) Are reserves for the payment of claims or the acquisition of capital items to be created?

12. Management.

(a) Are the members to have an equal vote on matters requiring a member vote (and management of the LLC, if it is managed by the members)? If not an equal vote, are the members to be divided into two or more groups or classes with differing voting or management rights, or are the members' votes to be weighted differently (such as in proportion to their interests)?

(b) Is the management to be vested in one or more managers? What are to be the duties of the managers? In what instances are the managers to secure the approval of the members?

(c) Is a bond to be required of any manager or officer?

(d) How are salary changes of the managers and/or officers to be made?

(e) How are checks to be signed?

(f) Are meetings of the members and/or managers to be held at regular times?

(g) Are any managers to receive a management fee? How is the management fee to be calculated?

(h) What voting percentage by members controls decisions (i.e., 51% of the membership interests; 67% of the membership interests; or unanimous consent of 100% of the membership interests)?

(i) Should certain major decisions require a super-majority percentage or unanimity?

(j) Should all members of the LLC be able to bind the company and sign on its behalf?

13. Are the members, managers and/or officers each to devote full time to the business? To what extent may they engage in other activities? May those activities be in competition with the LLC or in the same type of business as the LLC, and if so, must the business opportunity first be offered to the LLC?

14. What provision is to be made for settling disputes arising under the regulations of the LLC?

15. Prohibited Acts.

(a) Should the members or managers be prohibited from performing certain acts without the consent of all or a specified percentage or number of the members?

(b) Should the members or managers be restricted in their power to lend LLC money, to mortgage or pledge LLC property, to discharge an employee, or to close an LLC transaction involving more than a certain sum of money?

(c) Should the members be prohibited from mortgaging or disposing of any or all of their interest in the LLC?

16. Death, disability, expulsion, bankruptcy, or withdrawal of a member.

(a) Is provision to be made for the expulsion of a member? If so, how is expulsion to be decided upon?

(b) Is disability to be a ground for expulsion? For how long shall the disability continue before action may be taken?

(c) What advance notice must a member give of intention to withdraw? Is a withdrawing member to be prohibited from engaging in a competing business?

(d) Is provision to be made for the continuance of the business upon the death, disability, bankruptcy, expulsion or withdrawal of a member?

(e) Are the remaining members to have an option to continue the LLC or dissolve it? Is notice to be given of the exercise of such option?

(f) Is a member who withdraws wrongfully, to be penalized in any way?

(g) Is the LLC or are the members jointly or individually to have the right or option to purchase the interest of a deceased or withdrawing member?

(h) How is the value of the deceased or withdrawing member's interest to be determined?

(i) Is "good will" to be considered in such valuation? If so, on what basis?

(j) How and over what time period, if any, is payment for such interest to be made?

(k) If payment is not to be made in full at the time of purchase, what security for payment is to be given?

(l) Is the estate of the deceased to continue to participate in profits? For how long?

(m) What provision is to be made to make certain that the deceased or withdrawing member bears such member's equitable share of losses?

(o) Is a fund to be withheld or created for payment of contingent claims?

(p) In what proportions are the remaining members to divide the interest of the deceased or withdrawing member upon purchase?

17. Life Insurance.

(a) Do the members desire to purchase life insurance on each other's life with which to purchase the interest of a deceased member? If so, how much insurance is each to maintain on the life of the other(s)?

(b) If more than two members, do they desire a trustee to facilitate the arrangement? Who is to be the trustee?

(c) What provision is to be made for the member whose life is uninsurable?

18. Admission of new members, and transfer of membership interests.

(a) Are new members to be admitted during the existence of the LLC?

(b) What restrictions, if any, will there be on the transfer of membership interests?

(c) Will transfer of the entire membership interest be available only with the consent of the other members? Will majority consent or unanimous consent of the other members be required?

(d) Will transfers of membership interests be permitted to affiliates or to family members without the consent of the other members?

(e) Will members be permitted to transfer an economic interest only without the consent of other members?

(f) Will there be a right of first refusal on the transfer of membership interests? If so, what are the payment terms for any such purchase? Who may exercise the right of refusal? Will the LLC have the right to purchase the interest?

(g) Will the LLC and/or other members have the right to redeem or purchase the membership interest of a member upon such member's death, disability, legal incompetence, termination of employment, bankruptcy, or some other triggering event?

(h) If so, how is redemption price or purchase price to be determined (i.e., agreement of the parties, appraisal, multiple of earnings, book value, or any other formula)?

(i) Will there be insurance held by the LLC or by the members to fund such a buy-out in the event of the death or disability of a member?

(j) Will members be permitted to disassociate voluntarily? If so, should the statutory obligation to pay a withdrawing member the fair value of the membership interest be negated?

19. Dissolution.

(a) What events will cause the dissolution of the LLC (i.e., death of a member, bankruptcy or insolvency events, dissolution of members which are entities, disability or incapacity)?

(b) Are all members to act as liquidators? Are the managers to select the liquidators? What compensation are liquidators to receive?

(c) Are the assets such that they may be distributed wholly or partly in kind?

(d) Does any member wish the return of the specific items of property contributed?

(e) What shall be the order of distribution of the assets?

(f) Upon the occurrence of an event causing winding up, how may the LLC be continued (i.e., unanimous consent of all remaining members, or consent of 67% of percentage interests)?

20. Tax Treatment.

(a) Is the LLC to be taxed as a partnership or as a corporation for federal income tax purposes?

(b) Are there any other special tax considerations relating to the formation of the LLC?

21. How will available cash be distributed (i.e., to the members in accordance with membership interests; priority return to a certain member; etc.)?

(a) Should distributions of available cash differentiate between net cash from operations and capital transactions such as sales or refinancings?

(b) Will the LLC require any cash operating reserves, and how should "available cash" be defined?

(c) When will available cash be distributed (quarterly, semi-annually, annually, or upon consent of a manager)?

22. Will there be any restrictions on members' participation in other activities? Will there be any non-compete covenants? Will there be any contracts with affiliated entities?

23. Who will be the registered agent for service of legal process for the LLC, and what is the address for the registered agent?


[this checklist is reproduced with convenient lines to complete: here>]


After you have worked through, and answered these questions (some answers may require that you individually obtain counsel from your respective legal or tax professional my services will not include the rendition of any tax advice), please return this completed document to Thomas S. Rose.


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