Mistakes to Avoid When Forming a Limited Liability Company, Part II: Certificate of Organization

This is the second part of a series that covers the most common mistakes people make when trying to form a limited liability company (LLC) themselves. The first part of the series addressed the importance of an operating agreement. This second part will discuss how to avoid common mistakes when filing a certificate of organization.

Unlike an LLC's operating agreement, a certificate of organization is filed with the Commonwealth of Pennsylvania and becomes available to the public. On the form, which comes with an instruction page, there are seven sections to complete. Although it may seem like there are few ways to mess it up, you should be mindful of certain factors while preparing your company's certificate of organization. Avoiding common mistakes can help you save money and will make the formation of your LLC a smoother process.

Business Name

If you are forming an LLC, you should pick a name that is distinguishable from other names registered in the Commonwealth. This may seem like a no-brainer, but if you choose a name that is taken by another company, you may end up wasting money, especially if you order branded products, register a domain name or start purchasing marketing items with the unavailable name. Also, the name must include the words "limited liability company," "company," "limited" or some abbreviation of those terms. An attorney can conduct an appropriate search of the name and give you an opinion as to whether or not it is available.

Registered Address

The Certificate of Organization requires your company to have a registered office in the state. This is so that the Corporation Bureau has an address to mail you documents, such as an annual registration statement or decennial filing. In addition, the address becomes public record as a formal address for your business and can be used for legal purposes such as service of process in the event of a lawsuit.

Most people who have a separate commercial space use that address. You can also choose to use a registered agent service and list that company's address. If you don't have commercial space, you'll either have to use one of these companies or your own address. If you're going into business with a partner or partners and you don't have commercial space, it may be worth it to use a registered agent service so you're not relying on a partner to relay your information.

Organizer

An organizer is not the same thing as a member or owner. Like everything else on the form, the name of your company's organizer will be public information. If you don't want your name to be searchable or for anyone to be able to see that you are a member, you should use an attorney to form your company and act as your organizer.

Certificates

The Certificate of Organization asks if membership interests in your LLC will be evidenced by certificates, like shares in a corporation. Using certificates may or may not be a good idea depending on the relationship between the owners. Certificates can lead to unwanted transfers if they are not endorsed with language stating that their transfer is restricted by the Operating Agreement or a Membership Agreement between the members. In some cases, they can also lead to unnecessary expenses. If you are going into business with distant relatives or unrelated individuals, however, it may be a good idea to evidence your shares with certificates. That way you can put a legend on the certificate stating it is subject to the provisions of the operating agreement limiting the transferability of the membership interests, making it harder for the other owners to let in members without your consent.

Management

You will need to choose whether the company will be managed by members, or you can opt to have it managed by a manager. This is one of the most commonly overused options on the certificate of organization, and it sometimes leads to unwanted tax consequences. The only time a limited liability company should really be managed by a manager is when the owners are not actively involved in managing the company. This setup resembles a traditional corporation and allows members to elect a manager, just like a board of directors would pick a CEO. A manager does not need to be a member of the company and is different from a managing member, who is an owner/member selected by the other owners/members to run the company. If the members do not plan on selecting an outside manager, there's really no reason to be managed by a manager, and in fact, it is unnecessarily confusing (as some may find this section to be, with all its discussion of management, members, managing members, and managers).

Restricted Professional Services

After the section listing your company's effective date, the final section on the certificate of organization asks you to designate whether the company is going to operate as a restricted professional services company. Restricted professional services are limited to dentistry, law, medicine and surgery, optometry, osteopathic medicine and surgery, podiatric medicine, public accounting, psychology or veterinary medicine. If your company will provide any of these services, you must include them on the certificate. If you will not be operating as a restricted professional company, you would not want to be identified as such, because these are the only types of professions who must pay an annual registration fee to be an LLC. There are also certain provisions under the Business Corporation Law that govern the activities of restricted professional companies, so the selection or deselection of this option needs to be accurate.

As you can see, an otherwise simple looking form is deceptively complex. I have witnessed many individuals attempt to form their own businesses and come in later to seek help. Fixing missteps is often more expensive than seeking professional help to form your LLC.

Derek Dissinger is an attorney at Russell, Krafft & Gruber, LLP in Lancaster, Pennsylvania. He received his law degree from Duquesne University School of Law and practices in Business Law.

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