A pre formation LLC agreement is a contract signed by founders before the company legally exists. It defines ownership, contributions, and decision rights during the period between planning the business and filing formation documents with the state.
This stage is legally risky. The LLC does not yet provide liability protection. Any deals, expenses, or promises made belong to the individuals personally unless documented properly.
The agreement acts as a bridge between idea and legal entity.
Why They Matter
Most disputes happen before incorporation, not after.
Typical problems:
One founder pays expenses while others promise to repay later
A partner leaves after development work is finished
Intellectual property is created personally instead of owned by the future LLC
Someone signs contracts in their own name
Equity expectations differ
Courts treat this as a partnership if no agreement exists. That means shared liability and unclear ownership.
What the Agreement Establishes
The document does not replace an operating agreement. It controls the period before formation.
Key elements usually included:
Planned LLC name and purpose
Founder identities
Ownership percentages to be granted once formed
Capital contributions and reimbursement rules
Authority to spend money on behalf of the future company
Intellectual property assignment to the future LLC
Confidentiality obligations
Non compete expectations if applicable
Procedure to form the LLC and deadline
Conversion into operating agreement after filing
Intellectual Property Assignment
This is the most important section for startups and online businesses.
Without it, the creator owns the asset personally even after formation.
Assets commonly affected:
Software code
Website content
Brand name and logo
Product designs
Customer lists
Marketing materials
The agreement should state all work created for the project automatically transfers to the LLC upon formation.
Investors often require proof of this before funding.
Liability Before Formation
Before filing, the business does not legally exist.
Meaning:
Contracts are personal contracts
Debts are personal debts
Lawsuits target individuals
The agreement can specify which founder has authority to bind the future company and how liabilities are shared among founders.
It does not eliminate liability but distributes responsibility clearly.
Expense and Reimbursement Rules
Founders frequently pay costs unevenly during early stages.
Typical covered items:
Domain purchases
Software subscriptions
Legal filings
Prototype materials
Advertising tests
The agreement states whether these become loans, capital contributions, or reimbursable expenses after formation.
Without this, reimbursement disputes are common.
Transition Into Operating Agreement
Once the LLC is officially formed, the pre formation agreement should convert into or require execution of the operating agreement.
Many documents include a clause stating the operating agreement must reflect the ownership percentages already promised.
This prevents founders from changing terms after filing.
When You Need One
Recommended if:
More than one founder exists
You are building software or intellectual property before filing
Money is spent before registration
You are negotiating with vendors or clients early
You plan to seek investors
Less critical if you form the LLC immediately and begin activity afterward.
Common Mistakes
Waiting until after product launch
Not assigning intellectual property
Verbal ownership promises
Mixing personal and project funds
Signing contracts before defining authority
Most startup equity disputes originate from these situations.
Practical Principle
The LLC protects you after formation.
The agreement protects you before formation.
Both are necessary but serve different time periods.
Resources
IRS business structure overview
https://www.irs.gov/businesses/small-businesses-self-employed/business-structures
Uniform Partnership Act explanation Cornell Law
https://www.law.cornell.edu/wex/partnership
Intellectual property assignment basics US Copyright Office
https://www.copyright.gov/recordation
Small Business Administration startup legal steps
https://www.sba.gov/business-guide/launch-your-business/register-your-business