Excerpted from The Limited Liability Company by Phillip L. Jelsma and Pamela Everett Nollkamper
The first step of the LLC at formation is to hold an organizational meeting. The organizational meeting, sometimes referred to as the “First Meeting,” arguably is the advisor’s most important obligation. The organizational meeting is the first formal meeting for the members; it is the meeting that launches the LLC into its business operations.
At this meeting, the members elect or appoint management, whether it be member-managed or non-member-managed. If the LLC itself has not “signed off” on the operating agreement, this task should be completed. Provisions must be made for record keeping, a company seal if desired, share certificates if desired, a compilation of member capital contributions made, and each member’s total commitment to capital. If goods or services are to be contributed in lieu of capital, then the specific details should be recorded. The retention of an accountant and attorney should be formalized at the organizational meeting.
The organizational meeting proceeds in every American jurisdiction in the following manner:
(a) The advisor calls the meeting to order and for the first order of business an election is held for chief managing position. Once elected this chief officer then conducts the balance of the meeting, including the election of remaining officers.
(b) The next step is obtaining formal membership approval of the articles of organization and the operating agreement. When approved, the operating agreement is signed by all members and by the LLC.
(c) All local and state licenses and applications are completed, signed by the appropriate management and prepared for filing.
(d) The members select one of them to act as the designated tax matters member.
(e) Payment verification of each member’s capital contribution is the next step. If a member’s payment is to be made by past, present, or future services, the specifics are reported in written form in the minutes. A record of each member’s full payment of capital is written into the minutes.
(f) If members are to receive salaries, the amounts and specifics are reported and placed in the minutes. Likewise, the terms and conditions of the LLC’s use of a member’s real or personal property must be reported in the minutes as well.
Practice Note: If a member’s property is being used by the LLC enter it into a written lease. This is important so that if a member wants the property back, the terms of its return are clear. Likewise, if there is no written lease on the property, LLC creditors may attempt to claim the property as an asset of the LLC.
(g) Next, the members select a company bank and determine who can sign on the bank account(s). The appropriate bank resolution is placed in the minutes.
(h) If the LLC has retained services of professionals, such as attorneys and CPAs, the hiring and the terms of hiring are reported in the minutes.
(i) Adjourn the meeting and prepare the meeting minutes. With foresight, the advisor, in many cases, can have the minutes prepared prior to the meeting so that they can be signed by the members prior to leaving the meeting.
Practice Notes: It is good practice to set a date at the time of the organization meeting for a “1-year check-up” meeting. The check-up meeting allows the advisor to review the actions of the LLC and its members and make certain the company’s records and status are current.
The attorney should maintain a good paper trail with the newly formed LLC and its members concerning all advice given to the parties involving the organization of the LLC. Below is a sample letter that can be used to advise members of the organizational meeting and their basic duties and responsibilities.
Instructional Letter to Client Regarding the Meeting
City, State Zip
RE: ___________ Limited Liability Company
Enclosed please find documentation from the Secretary of State attesting the filing of the Articles of Organization for “___________ Limited Liability Company.” There was no delayed date specified in the Articles, so the existence of your limited liability company dates from the date the Articles were filed with the Secretary of State.
An organizational meeting is required to complete the formation of the company. At this meeting we will elect managers, appoint officers, adopt operating agreements, set up bank accounts, authorize salaries, and resolve other related financial matters. This meeting is set to be held in my office ____________ at _____ __.m. Afterwards, I will prepare the final draft of the operating agreement as adopted, and will assist the secretary in preparing the minutes of this meeting. These acts must occur before your company is formally established.
The following are some thoughts you should share with the members and management, once they are selected.
Signing documents. Whenever signing any document on behalf of the company, a member, manager, or agent must state beneath or opposite his signature, the full company name and the capacity in which he signs. Failure to make this notation may result in personal liability.
Duties of members, managers, and agents. As a general proposition limited liability company members, managers and agents have three basic duties that they must follow in performing their functions.
The first can be described as a “duty of diligence”. This means that a member, manager or agent must act with the care a reasonably prudent person would exercise under similar circumstances. You must act at all times in good faith and in a manner that is in the best interest of the company. This duty is an affirmative one that requires not only good faith and reasonable conduct on matters brought to your attention, but also requires that you make reasonable inquiries and monitor company affairs. While managers, members and agents are not insurers of the integrity of their subordinates, you are required to promote appropriate corporate conduct and to have a program to identify improper conduct.
A second basic duty is a “duty of loyalty”. Loyalty means that you should refrain from engaging in personal activities which would damage or take advantage of the company. Members, managers and agents hold a position of trust and confidence with the company and you cannot use this position to further your own private interests. You have an obligation to not create a conflict of interest with your company. For example, (1) you cannot realize secret profits or gains through personal transactions with the company; (2) you cannot compete with the company in such a manner that hurts the company; (3) you cannot usurp a company opportunity; and (4) you should avoid even the appearance of a conflict of interest.
Members, managers and agents have a “duty of obedience”. This duty requires that you perform your company responsibilities in accordance with our state law, your Articles of Organization and operating agreements. Members, managers and agents may be liable if they authorize an act which is beyond the powers conferred upon the company by its Articles of Organization, its Operating Agreements or the statutes. Therefore, it is important that the members, managers and agents acquaint themselves with the Articles and Operating Agreement, as well as the law that defines their responsibility.
Business Judgment Rule. Members, managers and agents are presumed to have complied with these three basic duties if they comply with a legal doctrine known as the “Business Judgment Rule.” This rule is unique and recognizes that not all director decisions will benefit the company. The rule holds that members, managers and agents will not be personally liable for their actions if they comply with its four elements:
(1) Business Decision. The rule protects members, managers and agents against claims for wrongful acts but not against claims for failing to act. Inaction is protected only when the inaction is unintentional.
(2) Disinterestedness. You are protected when your action reflects disinterested and independent conduct. Disinterested members, managers and agents are those who do not appear on both sides of a transaction and who do not expect to derive any personal financial benefit through self-dealing.
(3) Due care. Your decision-making must result from a reasonable effort to obtain all relevant information so your decision reflects an informed judgment.
(4) Good faith. The rule will protect you in your decision if you acted in the good faith belief that your decision is in, or at least not opposed to, the best interests of the company.
As this letter suggests, many acts of the members, managers and agents should be taken only after careful study and only with legal advice. Company counsel should be consulted. This not only helps to guide you into legally acceptable conduct, but also improves your ability to defend company action if it is taken in reliance upon legal advice. In addition to these duties and responsibilities, the law requires that certain reports and records be both maintained and provided to members, the state and other interested individuals.
If you have any questions please contact me.
About the Authors
Phillip L. Jelsma is a partner in the San Diego law firm of Luce, Forward, Hamilton & Scripps LLP where he specializes in tax law, with an emphasis on small business and international tax planning. Before joining the firm, he worked for the Internal Revenue Service and Arthur Young & Company. He is a certified public accountant in California and a graduate of Stanford Law School.
Pamela Everett Nollkamper is president of Gem Legal Management, Inc., a consulting firm in Corona, California. She is on the faculty of Fullerton College in its legal studies program. Ms. Nollkamper holds a B.V.E. in vocational education and an M.A. in business management. She is listed in Who’s Who in American Law.