An LLC, or a Limited Liability Company, is a legal entity that is used to run a business. Unlike a sole proprietorship which is essentially an unregistered business, running an LLC can give entrepreneurs some benefits like that of a corporation such as limited liability protection. There are many people involved in these types of business structures and it is important to understand the key differences that distinguish them from one another. In LLCs, two important roles include the member and the organizer.
An organizer is an individual or an entity that is solely responsible for the technical formation of an LLC. They are primarily involved with the submission of the required documents and the payment of the filing fees. Their responsibilities end when the LLC is filed and approved. On the other hand, a member is an owner of an LLC. Once the LLC has been formed, the member is then responsible for the operation and the management of the LLC. Aside from their responsibilities, members and organizers also differ in liabilities.
Member vs Organizer
Difference in Responsibilities
As far as businesses go, a significant amount of work is needed to become successful and there are different roles that need to be played to get it done. In an LLC, there are two important roles that are crucial for the formation and the operation of the business: the member and the organizer. The two roles are primarily distinguished by their responsibilities since the functions they serve do not overlap during the timeline of the LLC. However, the roles are not mutually exclusive as an individual can technically serve both roles.
The organizer is in charge of the technical formation of the LLC. This primarily includes the filing of the Articles of Organization (legal documents used to establish an LLC) and ensuring that the filing fees are paid for. The organizer is crucial for this period in the timeline of the LLC as the state is more concerned with the organizer than they are with the members.
During the application for the LLC registration, the organizer acts as the point of contact between the state and the LLC. This means that all forms of communication are directed to the organizer. This is important because the state will contact the organizer if any issues arise with the documentation submitted or with the process as a whole.
Anyone can become an organizer and most states only require that the organizer be at least 18 years old. Many people appoint their attorneys or accountants to be their organizers due to their expertise and familiarity with the processes involved; Business owners can act as their own organizers as well.
However, many LLCs make use of the services of an LLC formation service provider. An entity such as an LLC formation service provider is an acceptable organizer for an LLC and the services are typically considered to be affordable.
As soon as the LLC is formed and approved by the state, the organizer ceases to exist as their sole responsibility is to see to the formation of the LLC.
On the other hand, a member is an individual or an entity that holds membership interest in an LLC. They are essentially the owners of the LLC and are comparable to the shareholders in a corporation.
An LLC can have one member in a single-membered LLC, or it can have two or more members in a multi-membered LLC. While the sole member might be more proactive in the responsibilities involved in the LLC, the responsibilities of each member in a multi-membered LLC might not have the same weight; That strictly depends on what the members involved have discussed and agreed on.
The members themselves can manage the LLC; a setup considered as a member-managed LLC. However, the members can also simply hire a third-party individual or entity to manage their LLC for them – this is called a manager-managed LLC.
While the organizers are relevant in the Articles of Organization, the members are more focused on the Operating Agreement – documents that outline the financial and functional decisions of the business including rules, regulations, and provisions. The Operating Agreement is essentially used to govern the internal operations of the business in such a way that caters to the specific needs of the business owners.
Difference in Liabilities
Since the role of the organizers is strictly limited to the technical formation of the LLC, they do not receive liabilities that the LLC may fall into. However, there have been instances when the organizer can become liable for the LLC.
Due to a 2010 decision by an appeals court, a ruling was made that the organizer can possibly become liable for an LLC’s activities if the individual serving as an organizer has additional responsibilities in the LLC extending beyond that of an organizer. Depending on the extent of their responsibilities, the organizer can then be considered as a fiduciary or a trustee. In this case, the organizer must openly disclose if whether they are beneficiaries of the LLC.
With all that, it still conventionally proceeds that the organizer is considered free from liabilities that an LLC might get into.
On the other hand, members are not entirely unprotected as well. Due to the nature of the LLC, members are granted limited liability protection. This means that their personal assets such as property, cars, and bank accounts are not at risk if ever the LLC comes into financial debt and burden. Limited liability protection is one of the main appeals of registering a business as an LLC in the first place.
As the name suggests, the liability protection granted by the LLC to the members is limited. For instance, creditors understand the nature of an LLC and therefore usually ask for collateral from the members themselves. Only then would a loan be granted. In this case, financial debt would then fall onto the members in case of failure on the part of the LLC.
Committing fraud is another way members of an LLC can be held personally liable. In the event that the members were found making false claims or conscious omissions when applying for a business loan, the members are then held personally liable.