Category: Practice checklists

“BEST PRACTICES IN LLC FORMATIONS” (Post #4) – My LLC Formation Checklist

By , February 4, 2012 4:48 pm

The most basic “best practices” in forming LLCs are:

  • To create or acquire a checklist that tells you all of the legal and tax tasks that should be performed for clients who need comprehensive LLC formation services; and
  • To use this checklist whenever you form an LLC.

When you form an LLC for a client, you should, ideally, perform all of the tasks on your checklist that are within your professional expertise; and you should help your client find other professionals who can handle LLC formation tasks that are beyond your expertise.

I’ve been forming LLCs since 1993. I still find that after I think I’ve done all I should do for a particular LLC formation client and I look at my checklist, I find yet additional tasks to perform. Unless you look at your checklist, you always forget something.

Obviously, if your client wants comprehensive LLC formation services:

  • You and any professionals you associate yourself with should perform all of the tasks on your checklist;
  • You should perform each of these tasks thoroughly; and
  • You should perform each in accordance with the applicable best practice. (This means, of course, that first you have to determine this best practice.)

Obviously, if your clients want only a portion of the services on your checklist—i.e., they want only intermediate or basic services—that’s all you should provide; and you may have to provide some of these services less than thoroughly. But if this is the case, you should be clear about it in telling your client the scope of your representation—and I would argue that Rule 1.2 of the ABA Rules of Professional Conduct as in effect in most states so requires. Otherwise you might face a malpractice suit for what you didn’t do. And you should always begin by offering your client all of the services on your checklist.

Over a period of many years, I’ve spent scores of hours compiling my own LLC formation checklist, and I’ve asked a lot of other LLC lawyers to review my checklist. The resulting checklist is attached here. This checklist is the backbone of the third edition of Drafting Limited Liability Company Operating Agreements, my Wolters Kluwer LLC formbook and practice manual, on which I’m currently at work. The table of contents of the third edition as I currently envision it is here.

I’ll be quite grateful for any comments that, on the basis of your own LLC formation experience, you may have on either of the attached documents.


By , August 19, 2010 6:45 am

For the past several weeks I’ve been hard at work writing a law journal article that seeks to answer the above question under the Massachusetts LLC Act. 

I’ve concluded that in order to be able to form LLCs competently under that act, you need to possess a rather shockingly large amount of business organization law knowledge. 

Specifically, I’ve concluded that in order to handle non-tax choice of entity for your LLC formation clients, you need to know (i) the chief business organization law features of LLCs under the Massachusetts LLC Act and (ii) the similarities and differences among these features and those of all other types of Massachusetts business organizations. 

And I’ve concluded that in order to competently plan, negotiate and draft operating agreements for your clients you need to know:

  • The provisions of the Massachusetts LLC Act that are relevant to LLC formation practice (which, by my count, comprise 152 provisions);
  • Whether each of these provisions should be characterized as definitional, mandatory, default, non-self-enabling permissive or self-enabling permissive;
  • The tactical significance of these characterizations in forming Massachusetts LLCs;
  • Massachusetts LLC case law relevant to LLC formations;
  • The “gap issues” in Massachusetts LLC law—i.e., the issues on which this law is silent or ambiguous (so that, in the operating agreement, you won’t overlook any of these issues);
  • The principal business organization law issues relevant in Massachusetts LLC formations (so that you won’t overlook any of these issues) and the various alternative methods of resolving each of these issues in your clients’ best interest;
  • The rules of Massachusetts LLC law that govern Massachusetts LLCs that lack operating agreements (so that you can explain to your clients why they absolutely need to have these agreements); and
  • The potential adverse impact of these rules on Massachusetts LLCs and their members.

If the above question is one that you yourself have thought about, I’d be very grateful for your reactions to the above list.  In putting the list together, have I gotten just a bit carried away?


By , July 10, 2010 1:23 pm

What forms do you need for your LLC formation practice?

I addressed this question in my March 23, 2010 post in this blog, but since that date, my thinking about the question has significantly evolved.  My current thinking is that you need five distinct types of forms.  These forms are listed below.  I’ll be grateful for any comments you may have on this list.

1)     General-purpose model operating agreements.  You need general-purpose model operating agreements.  These model agreements should be designed to provide a basis for planning, negotiating and drafting all of the basic types of operating agreements that any LLC formation client is likely to need for any purpose (except the purposes addressed in the special-purpose model operating agreements discussed below).

The best way to organize general-purpose model operating agreements is on the basis of their three main structural features—namely, (i) their ownership structure, (ii) their management structure and (iii) their federal income tax structure.  If you organize them this way, you will find that there are 10 main types of LLCs (click here for a list of these types); and you will find that you need 28 specific general-purpose model operating agreements.  For a list of these 28 model agreements, click here.

In the summary and detailed tables of contents after the title page in each general-purpose model operating agreement and in the captions of its provisions, each of these agreements should identify all principal legal and tax issues relevant to the type of LLC for which the agreement is designed.  The tables of contents of the agreement should provide you with a comprehensive issues checklist in handling LLC formations. The provisions of each model agreement should provide you with optimal starting-points for resolving each of these issues.

For an example of a general-purpose model operating agreement for multi-member LLCs, click on the “forms” button of the top navigation bar of this blog and then click on the button marked “Form 6.2.”

2)     Special-purpose model operating agreements.  Depending on your practice, you probably need one or more types of special-purpose model operating agreements.  These may include, for example, model agreements for (i) husband-wife LLCs; (ii) Delaware series LLCs; (iii) promoter-controlled and investor-controlled investment funds; and (iv) LLCs whose members want short-form operating agreements.

3)     Model non-tax plug-in provisions.  You need a wide variety of model non-tax plug-in provisions that you can copy and paste into operating agreements you are drafting on the basis of general-purpose or special-purpose model operating agreements.  The purpose of these plug-in provisions is to supplement or replace the standard non-tax provisions in these model agreements when these provisions don’t meet your clients’ needs.  Examples of model non-tax plug-in provisions are (i) right-of-first-offer and right-of first-refusal provisions; (ii) drag-along and tag-along provisions; (iii) provisions to eliminate fiduciary duties in Delaware LLC agreements; and (iv) securities law compliance provisions.

4)    Model tax plug-in provisions.  You need various model tax plug-in provisions.  These are individual model provisions or sets of related model provisions on federal and state tax issues that you can copy and paste into general- and special-purpose model operating agreements to meet special tax needs of your clients.  Model tax plug-in provisions include, for example, (i) sets of plug-in provisions under IRC §§ 704(b) and 704(c)(1)(A); (ii) plug-in provisions under Prop. Reg. § 1.1402(a)-2 that will enable your clients to avoid the Self-Employment Tax on their shares of LLC income; and (iii) plug-in provisions for tax matters partners.

5)     Miscellaneous forms.  You need miscellaneous forms, including (i) forms for articles of organization or similar documents to file with relevant state officials to create LLCs; (ii) bylaws for use by LLCs with corporate management structures; and (iii) documents, in the form of attachments to operating agreements, which set forth the rights and duties of managing members and management committees.


By , February 25, 2010 8:03 am

Atul Gawande

Several years ago I began developing what I intended to be a comprehensive business entity formation checklist. The list is now included as Exhibit 2-2 in Drafting Delaware LLC Agreements and as Exhibit 5-2 in Drafting Limited Liability Company Operating Agreements. It is the master checklist in these books. You can access it by clicking here.

When I first wrote my checklist, it identified just 10 professional tasks. Now the list is up to 23. I have no doubt that as time goes by, it will continue to grow.

Recently, I read The Checklist Manifesto—How to Get Things Right, a terrific book about checklists by Atul Gawande. As you may know, Gawande is a Boston surgeon who also teaches at Harvard Medical School, is a staff writer for the New Yorker magazine, publishes a best seller every year or so, has a wife and three children, appears on Jon Stewart’s “The Daily Show,” and, apparently, doesn’t need to sleep. Gawande’s photo is on the right. Here are the key ideas in his book:

  • Technical knowledge has become so extensive and complex in most contemporary professions that, when professionals are performing their work, it’s very difficult for them to avoid overlooking critical tasks.
  • However, there’s a remarkably easy and inexpensive way to avoid professional errors: Use checklists!
  • There is overwhelming empirical evidence of the efficacy of professional checklists—above all in the field of surgery and in the prevention of hospital infections, but also in flying airplanes, building skyscrapers, selecting venture capital investments and in many other fields.
  • Despite this evidence, surveys show that surgeons tend to resist the use of checklists in their operating rooms because they don’t think they need them and because they view them as mindlessly mechanical. But although only 80% of surgeons have been willing to use the checklist that Gawande and the World Health Organization developed to ensure safe surgery, 95% of them say that if they were the ones going under the knife, they’d want their surgeons to use it!

I read The Checklist Manifesto with tremendous interest because I found that all of the above ideas and most of the other ideas in the book can be applied in direct and powerful ways to LLC formation practice. In my experience, good checklists are all but indispensable in these formations if you want to avoid important omissions.

But for people like me, who write books about their specializations (and thus also for my readers), I’ve found there’s another huge benefit to checklists: If, once you feel you’ve mastered the topic you’re writing about—e.g., the topic of how to form LLCs or, more narrowly, how to do non-tax choice of entity—you try to reduce your ideas to one or more practice checklists, this will not only enhance the value of your ideas for fellow professionals; it will also almost always force you to expand and improve your ideas.

The proof: If you read my entity formation checklist, I suspect you’ll think of at least one professional task it fails to address. If you do, please send a comment to this blog. LLC checklists need to be social—they need to be the products of LLC lawyer dialogue.