Understanding the LLC

The Limited Liability Company (LLC) is becoming a popular choice for many early stage ventures.

At heart, an LLC is simply a contractual agreement between different people about how to run a specific enterprise. Because the focus of an LLC is the relationship between the parties, state LLC enabling statutes typically grant significant flexibility in terms of LLC structure and governance.

LLCs can be as simple or as complex as needed. Like a traditional corporation, LLCs can issue “units,” or pieces of the business, to its various members. LLCs can also provide preferred units to investors (which might mimic preferred shares in a corporation). LLCs can also provide “profits-interest” units to key employees, which are a very loose (very loose!) analogue to stock options in traditional companies.

Key things to think about in setting up an LLC:

  • How many members will be in the LLC?
  • How will the LLC be apportioned amongst the members?
  • What will the members be exchanging to the company for ownership? For example, members might exchange their intellectual property or provide cash financing.
  • How will the LLC issue distributions to its members, and how often?
  • How will the LLC be managed? Will there be a sole manager? Will the LLC set up a board of directors? Again, LLCs have tremendous flexibility with respect to management.
  • How will disputes be handled amongst the members? This is a critical thing to think about. Most early stage ventures assume they will be successful, and it’s easy to avoid thinking about what happens in the event of a dispute.

For a template LLC term sheet, click here.