How to Form an LLC in Vermont!

In Vermont, the law requires a few things for LLC names. First, the name must contain one of the following: “limited liability company,” “limited company,” “L.L.C.,” “L.C.,” “LLC” or “LC.” The name must be distinguishable from every other business entity name that is registered with the Secretary of State.

Vermont LLCs must be registered with the Secretary of State before they can legally transact business in Vermont. This is done by filing articles of organization and paying a $100 filing fee. These articles of organization must include the name of the LLC, the designated office address, if the LLC has a set duration, the names and addresses of managers (if there are any), the name and address of the organizer and the registered agent, and if the members of the company are going to be liable for the LLC debts.

The affairs and conduct of an LLC are organized through the operating agreement. Vermont defines operating agreements as “stored or depicted in and tangible or electronic medium,” meaning that, unlike most states, Vermont does not allow for spoken or implied operating agreements.

EIN: Employees of a Vermont LLC and members of a multi-member LLC will need an Employer Identification Number from the I.R.S. to list on their tax returns. The LLC is responsible for getting this from the I.R.S., which can be done by an incorporation service.

Annual Report: Every Vermont LLC must submit an annual report with its name, name and address of its designated office and agent, principal office address, and names and business addresses of any managers. This is sent to the Secretary of State with a $25 fee ($125 for foreign LLCs).

Vermont Has a Growing Economy

Each year, Vermont forms over 3,000 new LLCs.  Vermont has over 11,000 active LLCs.  The U.S. Chamber of Commerce ranks Vermont sixth for higher education degree output, eighth for entrepreneurial activity and academic research and development intensity, and ninth for export intensity.

The Vermont LLC Act gives members contractual freedom to create voting and non-voting classes of membership and to customize their capital contributions and shares of profits and losses.  The ability to create voting and non-voting classes of membership facilitates everything from complex, multi-million dollar business deals to succession planning in family businesses and estate planning by gifts of non-voting interests.  The ability to specify a method for allocating profits and losses in an LLC agreement that is greater or lesser than a member’s portion of capital contributions gives members contractual flexibility to tailor their income and risks of loss to further their big-picture asset management plans.

Formation

The Act does not require filing of members’ names.  A “person” may organize an LLC by filing its articles of organization with the Vermont 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.

Duration

The Act provides for an LLC’s unlimited life.  Section 3023 states an LLC has an “at-will” duration unless otherwise provided in the articles of organization.  An LLC’s existence can therefore outlive its members’ lifetimes.

Dealing with Business Partners

The Vermont LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties.  Section 3059 has default rules that members and managers owe limited fiduciary duties of care and loyalty.  The duty of care requires members and managers to act with “the care an ordinary prudent person in a like position would exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the limited liability company.”  The duty of loyalty requires members and managers to not compete with the LLC or take a business opportunity away from the LLC, not deal with the LLC in a manner adverse to it or on behalf of parties who have an interest that is adverse to it, and act as a trustee of the LLC’s property.

But the Act gives members and managers contractual freedom to vary the default rules.  Section 3003 provides that an LLC agreement may “identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable.”  In addition, it contains a “safe harbor” provision for “interested” transactions, which are transactions between an LLC and one or more of its members or managers.  It provides that an LLC agreement may “specify the number or percentage of members or disinterested managers that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duly of loyalty.”

Preventing Unwanted Business Partners

The Vermont LLC Act allows members to protect their control of an LLC.  An LLC agreement may prohibit members from transferring their distributional interests.  But if an LLC agreement does not prohibit it, a transfer does not dissolve the LLC or entitle the transferee to participate in management or to become a member.  Instead, the transferee may receive only the distributions to which the transferor would have been entitled, and the non-transferring members must unanimously consent to the transferee becoming a member.

Creditors Only Get Passive Rights, Not Control Rights

Section 3074 provides that if a judgment creditor of a member obtains a charging order against the member’s distributional interest, the charging order is only a lien on the interest.  The judgment creditor has only the right to receive distributions which would otherwise be paid to the member.  The judgment creditor does not have a right to participate in management.  A court may foreclose on the lien and order the member’s distributional interest to be sold, but a purchaser at the foreclosure sale obtains only the distributional interest and does not become a member.  Section 3074 is the judgment creditor’s exclusive remedy.

Furthermore, section 3081 states that unless an LLC agreement provides otherwise or all members give unanimous consent, a person ceases to be a member of an LLC when the person makes an assignment for the benefit of creditors, becomes a debtor in bankruptcy, or fails to contest a petition seeking the appointment of a trustee, receiver, or liquidator over his or her property.  These events are considered “events of dissociation.”

A Vermont LLC must continuously maintain an agent for service of process in the state.  A commercial registered agent service may act as a Vermont registered agent.

Because of the advantages of forming an LLC in Vermont, 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 Vermont.  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 Vermont with your Delaware LLC (Form Delaware LLC).