You’ve Decided You Need to Form a Liability-Limiting Business Entity – Is an LLC the Right Choice? (Part 2 of 2)

What are the Organizational Documents for an LLC?

There are primarily two documents that govern an LLC: the Certificate/Articles of Formation and the Operating Agreement/Limited Liability Company Agreement.

Some states call the first document a Certificate of Formation and others call it Articles of Formation. In either case, this is the document you need to file with the state of formation’s secretary of state or other governing body to create an LLC.

It is usually a very short document; 2 pages at most. For example, here’s a link to the Delaware Certificate of Formation for an LLC.

The second document is the Operating Agreement or Limited Liability Company Agreement, synonymous terms. This document sets forth all of the governing provisions for an LLC, including how the company is managed on a day-to-day basis, the various members of the LLC interact and how proceeds from the operation of the business are distributed. 

Capital Raising Considerations

Generally speaking, venture capital firms prefer to invest in Delaware corporations. For instance, the National Venture Capital Association’s model legal documents – found here – are drafted for a Delaware c-corporation.

However, there are many sources of capital for your company and many early-stage investors, whether VCs, angels or otherwise, may not require you to be a Delaware corporation at the outset. The mechanics of converting an LLC to a corporation are straightforward, though it does require a rewrite of your organizational documents. LLCs often convert to a corporation at the time they receive VC money at their new investors’ request.

Angel investors likely won’t be concerned with investing in an LLC, especially if they are used to investing in early-stage companies. LLCs often raise funding with convertible notes or membership interests that vest over a period of time.

Conclusion

An LLC is usually the first choice of smaller, early-stage companies. They are more flexible than corporations, require less upkeep over time and are not unfamiliar to investors. As an LLC matures, it can easily convert to a corporation when the time is right.

If you’d like to speak with an AEGIS Law attorney about this topic, please contact Alex Prasad (aprasad@aegislaw.com).