When forming your LLC, you may wonder the importance of specifying your company’s “purpose,” and may be tempted to provide a hasty response or use a generic phrase such as “any purpose authorized by law.” The reason defining your company’s purpose is important is because the actions that the members or managers may legitimately take on behalf of the company are limited by the company’s purpose as stated in the operating agreement. In a member-managed LLC, the unanimous approval of all members is required for a member to make a decision to undertake an action falling outside of the company’s purpose. Likewise, in a manager-managed LLC, all of the members must approve any decision or action of the manager that falls outside the scope of the company’s purpose.
When defining the purpose of your LLC, you want to be specific enough to place reasonable limitations on the actions of the members or managers, but broad enough that it does not impede the ordinary course of business for your LLC. Generally one or two phrases or sentences can provide a sufficient purpose for your LLC, such as:
- Purchase and manage residential real property rentals;
- Provide landscape services; or
- Create custom artwork.
You can place more specific limitations within your purpose, but be sure you are thinking long-term. The LLC’s purpose as defined in the operating agreement can only be amended if all LLC members agree.
Putting a few minutes of thought into the purpose of your LLC is worth it to protect you and the other LLC members. In addition, just having the purpose conversation with the other LLC members can help facilitate important discussions to ensure everyone’s interests and expectations are aligned at the formation of the LLC.