How to Form an LLC in Rhode Island!

In Rhode Island, an LLC name must contain “limited liability company” or “LLC”, either upper or lower case and with or without punctuation. It must also be distinguishable on the records of the Secretary of State from every other entity organized in Rhode Island or qualified to transact business in Rhode Island.

Rhode Island LLCs officially come into existence when a “person” submits articles of organization to the Secretary of State with a $150 filing fee.  The articles of organization must include the LLC name, the name and address of the registered agent, how the LLC elects to be treated for federal income taxation, the principal office address of the LLC, a statement of whether managers or members will manage the LLC and the names and addresses of managers, and the name and address of the authorized “person” who signs the Articles of Organization.

Rhode Island law does not require an operating agreement, and does not require any such agreements to be in writing. Most LLCs have these agreements to set out how they will conduct their business and internal affairs. Incnow recommends that all LLCs have written Operating Agreements in the event of any disputes between members or managers.

EIN: Unless the LLC is a single-member LLC with no employees, it will need an Employer Identification Number from the I.R.S. This can be done directly, although some incorporation services will do this for a small fee.

Annual Report: Rhode Island law requires that LLCs file annual reports with the Secretary of State to maintain their status. Along with a $50 filing fee, this annual report must include the LLC name, principal office address, name and address of the LLC’s registered agent, a current mailing address, a statement of the business of the LLC, and names and addresses of managers.

The Rhode Island LLC Act gives LLC members contractual freedom to customize their contributions, rights, duties, and distributions of profits and losses.  In addition, it gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties, and it allows members to protect their control of an LLC.

Rhode Island Has a Growing Economy

Each year, Rhode Island forms over 3,000 new LLCs.  Rhode Island has over 17,000 active LLCs.

The Rhode Island LLC Act gives members contractual freedom to create voting and non-voting classes of membership and customize their capital contributions and shares of profits and losses.  Section 7-16-21 provides that the articles of organization or an LLC agreement may govern the voting relationship among members, and section 7-16-26 provides that they may govern the allocation of profits and losses.  Members can use this flexibility to tailor their income streams and risks of loss and facilitate everything from complex, high-dollar-volume transactions to succession planning in family businesses and estate planning by gifts of non-voting interests.

Formation

The Act does not require filing of members’ names.  A “person” may form an LLC by filing its articles of organization with the Rhode Island Secretary of State.  The definition of “person” is not just a natural person, but includes almost any kind of business or legal entity.  An LLC’s members may therefore have an entity or person who is not a member file the LLC’s articles of organization.  For example, although section 7-16-6 requires disclosure of the name and address of the person who signs the articles, if the members use a commercial formation service, they will not have to disclose their names and addresses.

Duration

The Act provides for an LLC’s unlimited life.  Section 7-16-3 states that every limited liability company has perpetual duration unless its articles of organization provide otherwise.  An LLC’s existence can therefore outlive its members’ lifetimes.

Dealing with Business Partners

The Rhode Island LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties.  Sections 7-16-14 and 7-16-17 have a default rule that members in member-managed LLCs and managers in manager-managed LLCs “shall discharge his or her managerial duties in good faith, with the care that an ordinarily prudent person in a similar position would use under the circumstances, and in the manner the manager reasonably believes to be in the best interests of the limited liability company.”  In addition, the Act provides that members and managers act as trustees of the LLC’s property.

The Act gives members and mangers contractual freedom to “opt out” of most of the default rules, however, by including provisions in the articles of organization or an LLC agreement that modify the duties.  Section 7-16-18 provides “the articles of organization or operating agreement may eliminate or limit the personal liability of a manager to the limited liability company or to its members for monetary damages for breach of any duty provided for in § 7-16-17,” except: (1) breach of the manager’s duty of loyalty; (2) acts or omissions not in good faith, or involving intentional misconduct or a knowing violation of law; and (3) any transaction from which the manager derived an improper personal benefit, unless the transaction was with the informed consent of the members or a majority of the disinterested managers.  The “informed consent” portion of the last element is a “safe harbor” provision for “interested” transactions, which are transactions between an LLC and one or more of its members or managers.

The result is the Act protects both majority and minority members.  It protects minority members because an LLC agreement may not completely eliminate fiduciary duties, even though it may limit them.  These provisions make minority interests safer investments and therefore more valuable.

The Act protects majority members because it provides a “safe harbor” to facilitate contracts and transactions between an LLC and one or more of its managers or members, or an entity in which they own an interest, if the contracts or transactions receive the informed consent of the members or a majority of the disinterested managers.  These rules give majority members and the LLC certainty in business planning and the ability to take advantage of mutually beneficial opportunities.

Preventing Unwanted Business Partners

The Rhode Island LLC Act allows members to protect their control of an LLC.  An LLC agreement may prohibit members from assigning their membership interests.  But if an LLC agreement does not prohibit it, an assignment does not dissolve the LLC or entitle the assignee to participate in management or to become a member.  Instead, the assignee may receive only the distributions to which the assignor would have been entitled, and all the other members must consent to the assignee becoming a member.  If a judgment creditor of a member obtains a charging order against the member’s membership interest, “the judgment creditor has only the rights of an assignee of the membership interest.”

A Rhode Island LLC must continuously maintain an agent for service of process in the state.  Most states call this position a “registered agent,” but the Rhode Island LLC Act labels it a “resident agent.”  A commercial registered agent service may act as a Rhode Island resident agent.

Because of the advantages of forming an LLC in Rhode Island, over 3,000 new LLCs are formed in the state each year.
Should you wish to have more flexibility and protection, you may instead form a Delaware LLC even if you operate in Rhode Island.  What are the advantages of a Delaware LLC?  (Delaware LLC Advantages).  We can then help you file an application for registration to do business in Rhode Island with your Delaware LLC (Form Delaware LLC).