professional advisors they decide to use a Nevada or Wyoming LP to hold the apartment building – and then qualify that entity to do business in California.
Of course, this means that they have to spend more money than is ordinarily required. If California law had been favorable they could have originally filed in California and be done. But they want to assert that Nevada law, which has never overturned or ignored the charging order remedy and has legislatively made it the exclusive remedy for creditors, will apply. (Later we will review the benefits of Nevada and Wyoming law.) While there is no guarantee that a California court hearing such a case will apply Nevada law, at least Mary and Gary, by creating a Nevada LP and qualifying it in California, can make the Nevada argument. We will discuss this issue later in the book.
And so Mary and Gary find themselves in the position of paying extra to be in a more favorable state. For them it is worth another several hundred dollars per year to use a Nevada LP.
As they proceeded both Mary and Gary and John and Liz learn it is also important to consider the specific issues associated with each document, as outlined next:
Limited Liability Companies
As mentioned, the first step in organizing an LLC is to prepare and file the Articles of Organization. While each state has different rules, there are common requirements:
Articles of Organization
LLC Name: Check for name availability with your state’s secretary of state. Consider separately trademarking and protecting the name within your state through your local secretary of state or within the country through the United States Trademark Office. (Visit www.uspto.gov for the government’s trademark search service. Our free guide “Winning with Trademarks” is available at www.corporatedirect.com/asset-protection/winning-with-trademarks.) Know that using a name like ‘bank’ or ‘finance’ in your entity name may require a license from the state. Other name restrictions may exist. For example, use of the words “Olympic” and “Olympiad” are restricted in Utah.
Purposes and Powers: You must make a statement about what kind of business your entity will engage in. Many states allow a broad, unlimited purpose and power to be stated, essentially saying that your entity has all rights available to engage in any and all legal businesses within that state.
Name and Address of Resident Agent: To provide claimants with an office in the state upon which to serve lawsuits, a resident agent must be obtained and a registered address listed. Please note that, as with LPs and Corporations, if you live in your state of organization you can serve as your own resident agent, although you may not want to do so. (First of all, you have just put your home address out on the internet. As you can imagine we have a number of horror stories associated with this lack of privacy.) Some states require the registered agent to be open during business hours. If you use your home address you may not meet this requirement. Your option is to use a private service. Most corporate entities (such as our firm) that act as resident agents charge a small yearly fee for this service.
Manager Managed or Member Managed: Unlike an LP or Corporation, either all of the members or a manager may run the LLC. Usually, this decision must be stated in the Articles of Organization.
Operating Agreement
Like the bylaws of a corporation, the Operating Agreement provides the rules for operation of the LLC. Common provisions likely to be found are:
Managers: The number of managers, the term, election and removal of managers will all be set out.
Restrictions on Transfer of Interests: Unlike shares of a corporation, the transfer of LLC membership interests is more complicated. The rules are set out in the Operating Agreement.
Distributions to Members: Profits and Losses: Profit distributions and loss allocations are governed by partnership law, which is different from the laws governing payment of dividends in a corporation. The rules for partnership law are more complex and are set out in the Operating Agreement.
Meetings: Many states leave the whole need for meetings up to the members. We suggest that annual meetings be held to satisfy entity formality issues. Any requirements should be set out in the Operating Agreement.
Charging Order: Although many states require creditors to follow the charging order procedure as a matter of state law, it is a good idea to include it in the Operating Agreement.
Other Requirements: You should also be aware of any requirements that your own state’s statute may have regarding Operating Agreements. In some cases, if you don’t provide for an issue you default to the state’s position on it. For example, Nevada law (Nevada Revised Statutes (NRS) 86.286) provides:
“A limited liability company may, but is not required to, adopt an operating agreement. An operating agreement may be adopted only by the unanimous vote or unanimous written consent of the members, and the operating agreement must be in writing. Unless otherwise provided in the operating agreement, amendments to the agreement may be adopted only by the unanimous vote or unanimous written consent of the persons who are members at the time of amendment.”
If you don’t provide otherwise, amendments must be approved by 100% of the members. If you don’t like the state’s default position you’ll have to draft the Operating Agreement to allow for a less than unanimous vote.
Limited Partnerships
To organize an LP, most states require that a certificate of Limited Partnership (LP-1) be filed with the secretary of state. As mentioned with LLCs, while each state may have unique requirements, the following are common requirements:
Certificate of Limited Partnership
Limited Partnership Name: As with the other entities, check on name availability with the secretary of state and remember that there are separate trademark requirements.
General Character of Business: “General character” is another way of saying “business purpose.” You need not be too specific in most states (i.e., you can describe the general character of the partnership as “to conduct any legal form of business in that state”).
Name and Address of Resident Agent: As discussed throughout the book, it is important to list a registered agent that will be in business next year.
Name and Address of General Partner: Some states also require the names and addresses of all limited partners.
Amounts of Contributions: Not all states require this and for good reason. Not many investors want it on the public record that they put $10 million into Wild Oats, LP. That kind of information is better kept within the company.
Duration: Some states limit a Limited Partnership to only 30 years’ duration. You must specify a termination date.
Events of Termination/Dissolution: Some states require the certificate of Limited Partnership to state what triggers dissolution or termination.
Limited Partnership Agreement
The Limited Partnership Agreement, like the LLC’s Operating Agreement and a Corporation’s bylaws, sets out the road map for operations. Common provisions
