Choosing the right structure for a Montana LLC

What decides the right structure for a Montana LLC?

The right structure for a Montana LLC comes down to three settings written into the articles of organization filed with the Montana Secretary of State: whether members or managers run and sign for the company, whether it is an ordinary or a professional LLC, and whether it holds separate series of members. Tax treatment is a separate federal and state choice layered on top. All three settings come from the Montana Limited Liability Company Act, Title 35, chapter 8 of the Montana Code Annotated.

Readers often treat an LLC as a single product. Montana law treats it more like a frame with adjustable parts. One or more persons may form the company, its existence begins when the articles are filed, and from that moment it is a legal entity separate from its members. The articles must also say whether the company has a fixed term and whether any member has agreed to be liable for company debts. A setting chosen in a hurry at filing is still a setting, and it reappears in every annual report and in every contract the company signs.

Member-managed or manager-managed: who can sign for the company?

This is the choice with the most day-to-day consequences. A Montana LLC is member-managed unless its articles designate it as manager-managed. In a member-managed company, the act makes each member an agent of the company for its business, so any member can bind it, except where that member has no authority in the matter and the other party knows it. In a manager-managed company, a member acting only as a member is not an agent of the company; the managers are.

Member management suits a small company in which every owner works in the business and is trusted to sign. Manager management suits a company with passive investors, a relative who holds a share without running anything, or owners who want one person to sign leases, loans and supplier contracts. The articles must list the initial managers, or the initial members, with their business mailing addresses, so the choice is visible on the public filing from the first day.

Before filing, write down who will sign contracts, open bank accounts and hire staff. If the honest answer is one or two people rather than every owner, manager management and a written approval list fit the business better. The same list belongs in the founder agreements that settle ownership and decision rules, so that the public filing and the private agreement describe the same company.

What does Montana require in the operating agreement?

Less than many owners expect. The act says an operating agreement need not be in writing, although certain matters, such as changing record-keeping duties or the process for admitting members, require a writing. Within those limits, members can set their own rules on voting, distributions, transfers of interests and what happens when someone leaves.

The act also lists terms that no operating agreement can change. It cannot eliminate the duty of loyalty or the obligation of good faith and fair dealing, cannot unreasonably reduce the duty of care and cannot unreasonably restrict a member's right to information and records. Where the articles and the operating agreement disagree, the operating agreement controls among members and managers, while the articles control for outsiders who reasonably relied on the public filing.

A signed, dated agreement remains the practical choice even though the law does not insist on one. An oral understanding between two owners is hard to prove after a disagreement, and a bank, lender or buyer will usually ask to see the document before relying on anyone's authority.

Does a Montana LLC protect owners from company debts?

In general, yes. A member or manager is not personally liable for the company's debts or obligations solely because of that role, and the act states that failing to observe the usual company formalities is not, on its own, a ground for personal liability. The exception is voluntary: the articles may provide that specified members are liable for certain company debts, but only if each of those members has consented in writing. That is why the articles must say whether any member has agreed to such liability.

The shield covers obligations of the company, not promises a person makes in his or her own name. A guarantee signed personally for a lease or a loan is a separate commitment, and the structure of the LLC does not undo it.

When does a professional LLC make sense?

Licensed professionals who want to practise through an LLC use the professional form, and the articles must say so and describe the professional services. The name must contain one of the designations listed in the act, such as professional limited liability company, p.l.l.c. or pllc, and it must follow any naming rules set by the licensing authority for that profession. Membership is limited to people and firms authorized to provide the service the articles describe.

The liability shield is narrower than in an ordinary LLC. A member who renders professional services remains liable for his or her own negligent or wrongful acts as if practising alone, and is liable for colleagues only where at fault in appointing, supervising or cooperating with them. A professional LLC also files a yearly statement of qualification with its licensing authority before April 15, and its annual report must state that all members and at least half of the managers are qualified persons.

Is a series of members worth the extra record keeping?

Montana's act allows an LLC to create series of members: groups with separate rights, powers or duties over specified property, obligations or profits and losses. When the articles or the operating agreement provide for it, debts tied to one series can be enforced only against the assets of that series, provided separate records are kept and the series assets are accounted for separately. Owners of several rental properties or of distinct equipment lines sometimes consider this to stop one problem from reaching the rest.

The protection depends entirely on the paperwork. Separate records, separate accounting and contracts that name the right series are the price of the structure, and a series whose assets cannot be told apart from the rest of the company struggles to meet the condition the act sets. For a single business with a single account, a series usually adds work without adding much protection.

How does the tax choice sit on top of the structure?

The IRS does not tax an LLC as an LLC. By default, a single-member LLC is disregarded for federal income tax, although it is still treated as a separate entity for employment tax and certain excise taxes, and an LLC with two or more members is taxed as a partnership. An LLC can elect to be taxed as a corporation on Form 8832, and an entity eligible for S corporation status elects it on Form 2553, within limits such as no more than 100 shareholders and a single class of stock.

Montana follows the federal choice. The Montana Department of Revenue taxes C corporations at a standard rate of 6.75 percent with a $50 minimum tax, filed on Form CIT, while S corporations file the pass-through return, Form PTE. Partnerships and S corporations can also make an annual, irrevocable election on Form PTE to pay Montana's pass-through entity tax at the entity level.

Keeping the entity question apart from the tax question is the habit described in the guide on comparing business structures by risk and administration. In Montana the two decisions are even made in different places: the management setting goes into the articles filed with the Secretary of State, while the tax election goes to the IRS and then shapes the Montana return.

Montana LLC deadlines and limits at a glance

The figures below come from the Montana Code Annotated, the IRS and the Montana Department of Revenue. Filing fees are not listed because the act leaves them to the Secretary of State, who sets and updates them.

What keeps the structure in good standing after filing?

Filing is the beginning of the record, not the end. The annual report repeats the management choice: a manager-managed company lists its managers and a member-managed company lists its members, each with a business mailing address, current as of the date a member or authorized agent signs it. Going 140 days past the deadline lets the Secretary of State dissolve the company administratively, and so does going 60 days without a registered agent in Montana.

Licences sit outside the LLC. The Montana Department of Commerce notes that local city and county offices handle general business licensing, while the state issues professional licences and specific registrations through agencies such as the Department of Labor and Industry and the Department of Revenue. An LLC formed in another state that transacts business in Montana needs a certificate of authority. Without one, it cannot bring a lawsuit in a Montana court until it obtains the certificate and it faces the daily civil penalty, although the validity of its acts is not affected.

A one-page record keeps all of this together: management type, names shown in the articles, registered agent, tax election, annual report window, licences held and the person responsible for each. Whoever is named as a signer should also read each agreement before signing it, using the method in reading a service contract clause by clause. Legal Kits offers general information to organize these questions. It is not legal or tax advice, and a Montana attorney or accountant should confirm the structure when ownership, liability or tax consequences are material.