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From Ni’ihau down to Hawai’i, all small business owners in Hawaii can eliminate personal liability for claims against their business by forming an LLC.

HOW TO FORM AN LLC IN HAWAII FOR YOUR SMALL BUSINESS

1) Naming Your LLC

“Limited liability company,” “L.L.C.” or “LLC” must be included in the name of every Hawaii LLC, although “limited” can be abbreviated “ltd.” and “company” can be abbreviated “co.” The name must also be distinguishable from the names of every other business entity that has filed with the State to form or transact business in Hawaii.

2) Filing Articles of Organization

Articles of organization are filed to give a Hawaii LLC official recognition. The articles of organization include the company name, the mailing address of the company, the name and address of the Registered Agent, the name and address of each organizer, if the company will have a specified duration, whether members are liable for the LLC’s debts, and the names and addresses of managers and the number of members (if manager-managed) or the names and addresses of members (if member-managed). These are submitted by an organizer to the Business Registration Division of the Department of Commerce and Consumer Affairs with a $50 filing fee.

3) Operating Agreement

Under Hawaii law, you are not required to have an operating agreement for your LLC. However, any agreement you make, either verbal or written, with the other members will be the operating agreement. Most LLCs have these to govern their internal affairs and set out rules of membership. We recommend that you have a written operating agreement and have every member execute it.

4) Continuing to do Business

FEIN: Federal Employer Tax Identification Numbers are necessary for LLCs with employees or more than one member. These can be obtained from the I.R.S. or an incorporation service.

Annual Report: Hawaii LLCs must file annual reports to maintain their status. This annual report must have the name and mailing address of the LLC, the name and address of the registered agent, and the same information on managers and members that was required in the articles of organization. The filing fee for the annual report is $15

WHY FORM AN LLC IN HAWAII?

The Benefits and Advantages of Creating a Hawaii LLC

Introduction

Hawaii Has a Growing Economy

Each year, Hawaii forms over 7,500 new LLCs.  Hawaii has over 31,000 active LLCs.  The U.S. Chamber of Commerce ranks Hawaii as the fifth best state for per capita income growth, and the seventh best state for long-term job growth.

Advantages of Forming a Hawaii LLC

The Hawaii LLC Act gives members contractual freedom.  An LLC agreement may not only govern the allocation of profits and losses, but may also govern the voting relationship among members.  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

A “person” may organize an LLC by filing its articles of organization with the Hawaii Director of Commerce and Consumer Affairs.  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 428-203 states that every limited liability company has an at-will duration unless its articles of organization provide for a limited term.  An LLC’s existence can therefore outlive its members’ lifetimes.

Dealing with Business Partners

The Hawaii LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties.  Section 428-409 has a default rule that members in member-managed LLCs and managers in manager-managed LLCs owe limited fiduciary duties of loyalty and care.  It limits the duty of loyalty to not competing with the LLC or taking a business opportunity away from the LLC, not dealing with the LLC in a manner adverse to it or on behalf of parties who have an interest that is adverse to it, and acting as a trustee of the LLC’s property.  It limits the duty of care to “refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.”

The Act gives members and managers contractual freedom to “opt out” of most of the default rules, however, by including provisions in an LLC agreement that modify the duties.  Members and managers cannot completely eliminate the duty of loyalty or unreasonably reduce the duty of care, but they may (1) “[i]dentify specific types or categories of activities that do not violate the duty of loyalty,” and (2) “[s]pecify 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 duty of loyalty.”  This second element is a “safe harbor” provision for “interested” transactions, which are transactions between an LLC and one or more of its members or managers.

Preventing Unwanted Business Partners

The Hawaii 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.

Creditors Only Get Passive Rights, Not Control Rights

Section 428-504 provides that if a judgment creditor of a member obtains a charging order against the member’s distributional interest, it “constitutes a lien on the judgment debtor’s distributional interest.”  That is, a charging order requires the LLC to pay the judgment creditor any distribution that would otherwise be paid to the judgment debtor.  But the judgment creditor does not have a right to participate in management.

A court may foreclose on the lien and order the distributional interest to be sold.  A purchaser at the foreclosure sale obtains only the rights of a transferee.  Obtaining a charging order and a foreclosure sale are the judgment creditor’s exclusive remedies.

The Hawaii LLC Act has an unusual provision related to what are called “events of dissociation.”  Section 428-502 provides that a person ceases to be a member of an LLC when the person transfers all of his or her distributional interest.  In addition, section 428-601 provides a person ceases to be a member when the person makes a transfer 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 of the person or of all or substantially all of the person’s property.

When a member becomes dissociated from an LLC, section 428-701 requires the LLC to purchase the former member’s distributional interest.  The LLC must pay the “fair value” of the distributional interest as of the date of dissociation.  The LLC must deliver a purchase offer to the former member within thirty days.  Although this provision of the Hawaii LLC Act is unusual because most states do not have a similar requirement, the provision enhances members’ ability to protect their control of an LLC.

Hawaii Registered Agent

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

Conclusion

Because of the advantages of forming an LLC in Hawaii, over 7,500 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 Hawii. 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 Hawaii with your Delaware LLC (Form Delaware LLC).

Hawaii LLC Act Statutory References
§ 428-101“Definitions”
§ 428-103“Effect of Operating Agreement; Nonwaivable Provisions”
§ 428-107“Registered Office and Agent”
§ 428-202“Organization”
§ 428-203“Articles of Organization”
§ 428-210“Annual Report”
§ 428-405“Sharing of and Right to Distributions”
§ 428-409“General Standards of Member’s and Manager’s Conduct”
§ 428-502“Transfer of Distributional Interest”
§ 428-503“Rights of a Transferee”
§ 428-504“Rights of Creditors”
§ 428-601“Events Causing a Member’s Dissociation”
§ 428-1002“Application for Certificate of Authority”