The owners of a limited liability company (LLC) are called members, and an LLC membership certificate simply confirms the member’s ownership as either a percentage or in units. This differs from a corporation, which distributes ownership via shareholder certificates. Membership certificates are not required for LLCs, but they could be useful if you plan to raise money and issue ownership to investors. Ownership percentages or units can also be specified in an operating agreement.
An LLC is a business entity that offers liability protection for owners, as well as pass-through taxation, much like a sole proprietorship. To learn more about LLCs, read this Step By Step article.
What Is an Operating Agreement?
An operating agreement is not required in every state but is highly recommended. The operating agreement should clearly define the following:
- The percentage of each member’s interests in the LLC
- How profits and losses will be allocated to each member
- Each member’s rights and responsibilities
- The management structure and management roles of members
- The voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
To learn more about the operating agreement you can read this Step By Step Business article.
What’s Included in the Membership Certificate?
The membership certificate is a fairly simple document. Membership is either issued as a percentage, or as units. For example, if the LLC has 2 members, each can be issued 50% of the LLC, or 60% and 40%, or any distribution that has been agreed upon. Alternatively, the LLC members could decide to issue 100 units, with one member getting 55 and the other 45, or another agreed-upon distribution.
Membership certificates will then be issued with the following information:
- Member’s name
- LLC name
- State in which the LLC operates
- Share or units owned by member
The member to whom the certificate is issued and the LLC both keep a copy of the document. Keep in mind that if the ownership has also been spelled out in the operating agreement, that is the document that will be used for legal purposes.
How to Form an LLC
- Choose Your State. The first step is to choose the state in which you plan to do business. LLC processes and requirements vary by state, so visit your state’s website for details. Generally, you can form your LLC with an online application. If you plan to have physical locations in more than one state, you will need to register a foreign LLC in the states where you will do business other than your home state.
- Choose Your LLC Name. Your business name is extremely important. It should reflect the brand you plan to build, tell customers what you do, and be memorable. Once you’ve chosen a name, you’ll need to make sure that it’s not already taken. You can do a search on your state’s website, and on other state websites if you are doing business in more than one state. You should also check the US Patent and Trademark Office to make sure the name hasn’t been trademarked.
- Choose a Registered Agent. A registered agent is the person or company that sends and receives legal documents on behalf of your LLC. The registered agent can be a member of the LLC, or you can choose a third party such as an attorney, or a company that offers registered agent services. Most states require you to have a registered agent. The agent must be a resident of the state where you do business, or a corporation authorized to do business in your state.
- Determine Your Management Structure. There are two types of management structures:
- A Member-Managed LLC is managed by the members of the LLC. This is usually chosen by smaller LLCs with few members who will be involved in various management roles.
- A Manager-Managed LLC is managed by people who are not members of the LLC and are employees of the business. This structure is often used when an LLC is larger and has multiple members.
- File Articles of Organization. The articles of organization is the form you file to create your LLC. These forms vary by state but can generally be filed online. You’ll need to fill out the LLC name, the name and address of the registered agent, the names of the LLC owners, and in some states, the way the LLC will be managed. Fees are generally around $100.
- Draft an Operating Agreement. Again, an operating agreement is not usually required but is highly recommended. It will also spell out the ownership percentages along with the membership certificates. It’s a good idea to have an attorney’s help when creating your operating agreement so that you can be sure you’re covering all bases to protect all members and avoid future issues.
- Apply for Business Licenses. It’s important to make sure you’re in compliance with all laws at the local, state, and federal levels. It’s likely, depending on your location and type of business, that you’ll need business licenses and permits. Do some research to determine which licenses you need. At the very least you’ll need a sales tax permit to sell products and collect sales tax.
- Obtain an EIN. EIN stands for Employer Identification Number and is like a social security number for your business, allowing the IRS to identify your business easily. It is also known as a Federal Tax Identification Number (FTIN), or sometimes for corporations a Tax Identification Number (TIN). An EIN is required if your LLC has more than one member, if you plan to hire employees, or if you choose to have your LLC taxed as a corporation. The application is free and can be found on the IRS website. The application is form SS-4, and it can be mailed to the IRS or submitted electronically, and once your information on the application has been validated, the EIN is assigned immediately.
- File Annual Reports. Your state may require you to file annual reports for your LLC, which may involve a fee. Check your state for requirements.
Once these steps are completed you can issue member certificates if you choose.
Membership certificates simply document each member’s ownership share in the LLC. They are not required but are useful if you plan to issue ownership to investors. An operating agreement, however, is important to have because it will contain much more information and be the go-to legal resource if there is ever a business dispute or issue. It’s always advisable to have an attorney’s help when preparing these documents and forming your LLC.