Limited Liability Companies For Dummies
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About this ebook
There’s no better time than now to start a new business and tap into the power of the LLC
LLCs For Dummies is your comprehensive guide to limited liability companies. You’ll explore whether an LLC is the right business structure for your business, how to set up a corporate structure and membership, and the best ways of managing an LLC. Author Jennifer Reuting explains the pros and cons of LLCs and shares insider tips on choosing members, selecting a company name, creating and filing Articles of Organization, managing day-to-day operations, and beyond. This updated edition covers all the latest tax and regulatory information, plus new laws that make it more attractive than ever to start your own business. You’ll also find real-world advice on customizing your LLC for your specific business needs, creating a great operating agreement, keeping accurate records, and filing the proper paperwork with Uncle Sam.
- Learn to start a new business by founding a limited liability company (LLC)
- Get a handle on the differences between LLCs and other business structures, including state-specific tips
- Keep up on the latest information on federal taxes, regulations, and fees
- Discover online tools, new documents and forms, and helpful resources
Anyone who wants to learn the best practices of LLC formation, management, and long-term growth will love this beginner-friendly Dummies guide.
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Limited Liability Companies For Dummies - Jennifer Reuting
Introduction
People are now, more than ever, realizing the power of the limited liability company (LLC). If you’re like many people, you probably understand that an LLC can benefit you somehow; you just don’t know the next steps to take. Maybe you’ve just purchased a piece of real estate and know that it should be protected in some way; you just don’t know how to form the LLC and do the transfer. Or, on a whim, you created an LLC for your current business and don’t know what to do now. How do you transfer assets? What do you do at tax time? How can you take on a partner?
You now hold the key to some of the most powerful and successful strategies of the rich. This book was written to simplify your life and eliminate the guesswork of forming and owning an LLC. After all, your LLC should work for you, not the other way around.
After I get into the basics of LLCs, I explore some more complex strategies. This info sets this book apart from all the others. The rich have used a lot of these strategies for decades to operate their businesses, protect their assets, and pass on their estates. Now, I’m putting the power in your hands. When you find a strategy that may work for you, I encourage you to sit down with your team (your attorney, accountant, and/or corporate consultant) and figure out how to build on it and customize it to your specific situation. Use this book as your starting point. Your possibilities are endless, and your asset protection and tax strategies should grow along with you.
If you’re like me and tend to read books from cover to cover (there’s a good chance you are if you are reading this Introduction right now!), then fair warning: this book might seem a bit repetitive. Consistent with the Dummies style, it was written so you can flip to whatever section you need at any point and still understand that section in its entirety. Unfortunately, that means repeating crucial information you may have just read in the previous section. Don’t hate me. I promise you’ll appreciate it later when you flip back to certain chapters for reference.
Now, get going on your journey to success, and don’t look back!
About This Book
Although this book was written in an easy-to-understand, concise manner, I didn’t limit it to the basics. You’ll find that many other books on LLCs just skim over things, filling their pages with forms and legal statutes. They often just cover the basics of filing your articles and creating your operating agreement without delving into the more powerful uses of LLCs or the strategies with which LLCs can be integrated. Instead, I crammed these pages with valuable information you’d be hard-pressed to find in other books.
Even though this is a For Dummies book, you’re no idiot. You don’t want to be put to sleep while reading a jargon-laden book on complex strategies that even most attorneys can’t understand. You want something that dives deep but keeps it simple, and that’s what I strive to give you — well-organized, easy-to-read, and fluff-free information.
I know, I know — you’re busy! You operate on a need-to-know basis, and the rest is just gibberish. Therefore, to speed things up a little, feel free to ignore anything with a Technical Stuff icon next to it. The information in those paragraphs isn’t really necessary to understand the topic. Also, the sidebars are fun, but they’re sort of a bonus for those who aren’t time-impaired. Feel free to skip those, too.
I use a few conventions in this book. They’re pretty intuitive and easy to understand, but here’s a rundown anyway.
Any industry terminology that may be new to you will appear in italics.
I boldface the action parts of numbered steps and keywords or the main points in bulleted items. Also, I use boldface when referring to important forms.
Sidebars, which are the gray boxes of text, contain fun stories, examples, or other pieces of information that are great to know but not necessary to read if you’re in a time crunch.
Nine times out of ten, I won’t spell out limited liability company
but will instead use the abbreviation LLC.
I can’t help it — it’s just too easy!
When this book was printed, some web addresses may have needed to break across two lines of text. If that happened, rest assured that I haven’t added any extra characters (such as hyphens) to indicate the break. So, when using one of these web addresses, just type in exactly what you see in this book, pretending the line break doesn’t exist.
Foolish Assumptions
In order for this book to cater to a broad audience, I needed to make some foolish assumptions about you, the reader, and your skill level. After all, it’s not Limited Liability Companies For Attorneys or Limited Liability Companies For Residential Real Estate Investors. It’s Limited Liability Companies For Dummies — in other words, everyone.
Let’s see if any of these shoes fit:
You’re a budding (or experienced) entrepreneur looking for the next leg up.
You have a business and want to finally get legit and form an entity to protect yourself.
You’re a real estate investor looking to save some dough and keep your butt out of the courtroom.
You’re an inventor who wants to protect your patents from a random lawsuit that may be just around the corner.
You have intellectual property and want to keep it right where it is — in your name.
You’re old or young and planning your estate.
You want to raise money for a project and want a vehicle to keep things in order and sweeten the pot for your investors.
You were born on a day that ends in the letter y.
If any of the above assumptions fits your profile, then this book was written especially for you!
Icons Used in This Book
I use icons to highlight important information. When you see these, make sure to pay close attention — otherwise, you may miss some really good info!
Tip This icon flags helpful tips, tidbits, and secrets that may give you an upper hand on your road to success.
Remember If I mention a topic more than once and/or use this icon, then you should make an effort to remember the information. These concepts are often the most important.
Warning Whenever I use this icon, you should watch out! Obtain advice that is specific to your situation from a professional. Otherwise, legal or financial snares can ensue.
Technical stuff I use this icon to flag some technical stuff that may be a little advanced and difficult to understand for the LLC novices out there. When you encounter one of these icons, don’t worry — just ignore the information or ask a competent professional for advice.
Check it out When you see this icon, know that I’ve got you covered. This icon flags the extra information and helpful, time-saving tips.
Webextras I use this icon to flag helpful online resources, where you’ll find additional help.
Beyond the Book
One of the great things about LLCs is how much you can do with them! Unfortunately, if I were to write everything one could possibly know, this book would rival the length of War and Peace. So, to save some trees, this book you’re reading right now comes with digital perks!
First, I have created a password-protected online resource center made specifically for For Dummies readers. When I mention state laws throughout the book, I will refer you to this online resource center for more information specific to your state. You can access this information anywhere, and you can also be sure that it’s up-to-date. The online resource center can be found at http://www.corpassure.com/dummies. The password is onesmartdummy.
You can locate the Cheat Sheet at https://www.dummies.com/article/business-careers-money/business/small-business/general-small-business/limited-liability-companies-for-dummies-cheat-sheet-207646/, where you’ll find handy hints and tips.
Where to Go from Here
One of the many great things about a For Dummies book is that you don’t have to read it from cover to cover to get to what you need to know. This book was designed to be jumped into, with each chapter standing on its own. Find a topic that interests you and start there! After all, why waste time reading mundane topics you already know when you can immediately get to the good stuff?
If you’re a complete novice and just dipping your toes into the whole LLC concept, you may want to read Chapters 1 through 3 and then skip to whatever topic interests you most. If you have already formed your LLC and are looking for the next step, you may want to skip to Chapters 8, 9, and 10 to find out how to create or revise your operating agreement. Only interested in the use of LLCs for real estate? Skip to Chapter 17. Ready to dissolve your LLC? Feel free to flip to Chapter 15.
Or, you can read the book cover to cover if you want. You get a lot of juicy info out of every chapter!
Part 1
The ABCs of LLCs
IN THIS PART …
Gain a broad understanding of LLCs, including how they are formed and managed
Discover the many types of LLCs and the pros and cons of choosing each one
Compare LLCs to other types of business structures to determine if an LLC is right for you and your business
Chapter 1
What Is an LLC, Really?
IN THIS CHAPTER
Bullet Getting an overview of important LLC topics
Bullet Creating your plan of attack
Bullet Knowing the essentials for operating an LLC
The Limited Liability Company (more commonly known by its acronym, LLC) is by far the most popular business structure. Only two decades ago, the LLC was the new kid on the block — untrusted and unverified. Luckily, that changed pretty rapidly — LLCs gained popularity and, within a short time, became firmly established in the business world. Since then, LLC has become a household term, and for good reason.
The LLC is a complete divergence from the predominant business structure at the time, the corporation. While corporations have a fixed management structure, LLCs offer flexibility. While corporations have strict rules regarding owners and profit distributions, LLCs are adjustable. While corporations are stuck with corporate taxation (or its limited variant, S corporation taxation), with an LLC, you can select whichever form of taxation you prefer. The added flexibility of the LLC enables you to build a solid foundation for your business that works for your exact circumstances.
Great, right? Well … yes and no. With all the hoopla and the incessant commercials from filing companies, we all know how easy it is to file an LLC. However, very few folks can really explain how an LLC works or why an LLC is right for your situation — or, even worse, how to actually structure an LLC after receiving that one-page filing back from the state. Aside from hiring a pricey attorney to do all the work (not an option for most people), most of your peers don’t know how to do simple things like issue the ownership properly or formally agree on what happens if one of the partners wants to leave.
The LLC is a powerful tool, but if you don’t know how to use it — how to build that crucial foundation that will support your greatest potential — then it really amounts to nothing more than the piece of paper on which your formation document is printed … and possibly a few lawsuits along the way.
I go into detail on setting up an LLC for your specific circumstances later in the book, but first, I want to give you an overview — or a refresher if you’re a seasoned pro — on the meat and bones of this awesome business structure.
Understanding How LLCs Work
Think of an LLC as a partnership on steroids. If you and a buddy were to get together and start a business without registering it as any particular business structure with the state, your business would automatically be considered a general partnership. All business income and losses would be reflected on your personal tax returns. No rigid formalities would be required — you could literally draft your agreements on a napkin.
The problem is, what happens if you want to raise capital? The business is made up of only you and your partner and possibly some assets you’ve acquired along the way. You can’t exactly sell pieces of yourself. Or what if your partner ends up being, well, a jerk? Or even worse, a jerk who runs up a lot of debts that you could be personally responsible for? Eek! As unfair as it sounds, that was the reality for most partnerships…until the LLC came along.
The LLC takes all the best features of a partnership (pass-through taxation — defined at the end of this chapter — and no hefty burdens of corporate formalities) and the best features of a corporation (personal liability protection and ownership shares) and for good measure, adds a few extra perks, like the capability to choose your form of taxation and a formal yet flexible management structure. In addition, the LLC can offer a second layer of liability protection that shields the business from any personal lawsuits that may befall you (referred to as charging order protection, which I elaborate on in Chapter 16).
If all this sounds like Martian to you, don’t worry. In this chapter, I dive into some of those benefits and other LLC fundamentals while steering you toward other chapters in the book where you can read about specific topics in more detail.
Owners: You gotta have ’em
Although LLCs are separate from their owners in many ways, LLCs still require owners. An LLC without an owner is like a child without parents: It simply doesn’t exist. So, even though you may have called up a filing company and filed your LLC with the state, it doesn’t become its own legitimate entity until you go through the process of doling out ownership in your LLC.
The owners of an LLC are called members. They have units of ownership called membership interests that show what percentage of the company they own and how much influence they have when voting on important company matters. Membership interests in an LLC are comparable to stock in a corporation. However, unlike the S corporation, which is often compared to the LLC, an LLC can have unlimited members of any type. Members can be citizens of other countries or even entities, such as corporations, partnerships, or trusts.
Unlike corporations, LLCs offer a lot of flexibility in how you issue membership. For instance, your LLC can have many different forms of membership called classes. You can set whatever rules you like for each class. If you structure them properly, classes are a great way to entice investors or partners to join your business — some folks may want a bigger piece of the profits up front, while others may want more control. For example, one membership class can get first dibs on the profit distributions, while another class only gets paid with what’s left over. Or one class can have a say in managing the company, while another class must remain silent. With an LLC, you can mirror the LLC membership classes to match your individual partners’ priorities and needs.
The owners of an LLC not only own the entire business and all its assets but also generally have the final say. Although they may not all manage the business’s day-to-day operations, they do elect the managers. They vote on important issues and ultimately control the company’s fate. In Chapter 9, I go into more detail on membership, including how to issue it and structure it in a way that works for your business.
Technical stuff When it comes to reading state laws, the actual term for LLC members and their membership interests can vary from state to state. For example, in some states, the membership interest is called ownership interest or limited liability company interest. Just keep in mind that no matter what they’re called, the concepts are the same.
If your LLC has only one member, it’s called a single-member LLC. Unless the single-member LLC elects corporate taxation (which I’ll show you how to do in Chapter 7), the IRS treats it as a sole proprietorship — or disregarded entity — for tax purposes.
All states now allow single-member LLCs. (It took a while for a few states to jump on the bandwagon – I’m looking at you, Massachusetts). However, in a few states, because of certain court rulings, single-member LLCs can be disadvantageous for certain purposes — they aren’t afforded the benefit of partnership taxation and aren’t guaranteed charging order protection, which protects the LLC from lawsuits that may be filed against you personally. I discuss this concept in depth in Chapter 16.
Contributions: Where the money comes from
When you buy a share of stock on the stock market, the money you pay is what you are contributing (or investing) in return for a percentage (or share) of the company’s ownership. Well, purchasing ownership in an LLC is very similar: In exchange for a membership interest in the company, a person or company must contribute something of value. This contribution can be in cash, services, hard assets such as equipment, real estate, or even promissory notes (which are allowed in some states).
When a new business is formed, all the initial owners, or founding members, come together and pool the value of their contributions. Let’s say Jane contributes $100,000 in cash, Chris contributes $5,000 in cash and $25,000 in services, and Joe contributes an office building worth $150,000. The combined total of their contributions is $280,000. To determine each person’s percentage of ownership in the LLC, they simply divide their contributions by the total. The result: Jane gets 35.7 percent, Chris 10.7 percent, and Joe 53.6 percent.
Technical stuff After you figure out each owner’s percentage of ownership, determining their membership interest in the company is easy. Given the previous example, if the LLC has 1,000 membership shares, then Jane’s 35.7 percent ownership in the company translates to 357 membership shares, Chris’s 10.7 percent results in 107 membership shares, and Joe’s 53.6 percent results in 536 membership shares. I dive into more details on issuing membership in Chapter 9.
The contributions made by the founding members (those on board when the company was formed) and their corresponding membership interests are listed in the LLC’s operating agreement. That way, it’s documented that all the owners know what everyone else is contributing to the business and agrees on the value of those contributions.
Things get a bit more complicated when a new member joins an existing company. Newly formed companies have no value — assets are added as contributions. However, things can get weird when a business has been in operation for a while and elects to bring on additional contributions (and often new members). I mean, is Apple still worth the $10,000 it took to get things going in Steve Jobs’s garage? Ha! Not even close. As businesses evolve, they increase in value. In Chapter 10, I go over the intricacies of taking on new capital and issuing membership in existing businesses.
Some LLCs issue membership certificates that, like stock certificates in a corporation, are paper evidence of the amount of ownership a member has in the company (although these are now often in digital form). The membership certificate displays the member’s name and the number of membership shares the person owns. However, physical membership certificates are no longer a legal requirement in most states, and their digital form has replaced the paper version, like so many other things in our lives.
Regardless of whether your LLC issues membership certificates, your membership interest should be listed in the operating agreement next to your contribution amount. (In Chapter 9, I show you how to properly list your members, their contributions, and their membership interests in your operating agreement.)
Allocations and distributions: Getting what you’re due
After an LLC starts turning a profit, the members will no doubt want to benefit. After all, they didn’t invest their hard-earned money in the company for nothing — they want to see a return! At certain times — usually at the end of the year, but sometimes at the end of each quarter — company profits can be calculated and doled out to each member, usually in proportion to their percentage of ownership. These payments are called distributions and are generally cash (see Chapters 9 and 13 for more on distributions).
Now, as many of you savvy entrepreneurs know, growing a business is hard enough without draining it of its much-needed cash in the first few years. You’ll hold off on sending checks to the investors and instead use that revenue to grow the business. But what happens when your business still shows a profit at the end of the tax year? Maybe you’re saving up to purchase property or other assets pertaining to the business. Well, unfortunately, Uncle Sam still wants his share. And with the partnership form of taxation (how most LLCs elect to be taxed), the owners of the LLC are still allocated this revenue and must pay tax on it … even though they never saw the cash.
I dive into this topic in more detail in Chapter 7, where I discuss the different forms of taxation that an LLC can elect. Until then, just know that if you elect the most common form of LLC taxation — partnership taxation — then you need to understand the differences between allocations and distributions. Allocations are the profits on which you and your partners have to pay taxes. Distributions are the money you actually get, in your pocket, ready to be spent on that new backcountry snowboard you’ve been craving.
Tip Unlike corporations, LLCs don’t necessarily have to distribute profits proportionately to the members’ percentage of ownership. The members can decide to vary the distributions however they want. The IRS generally allows this practice as long as you pass their tests (mainly to prove that you aren’t varying the distributions simply to avoid taxes). This strategy gets complex, and I dive into it a bit more in Chapters 9 and 13; however, if used correctly, it can result in some huge incentives for powerful partners and investors to join your team.
Distributions also occur if your LLC goes out of business, but they’re handled differently in this case. The LLC’s assets are liquidated, the creditors are paid back (including any members to whom the business owes money), and then the remaining amount is distributed to the members according to their membership interests or, more specifically, their capital accounts. Capital accounts can be, well … complex. But an easy way to think of them is how your percentage interest evolves over time as more contributions to the company are made. They also tend to keep accountants in business.
The key takeaway here is this: When the final distributions are made, you can’t choose how the money is distributed — it must be doled out according to the balance of each member’s capital account.
Management: Some folks are just better at it
Just because you own it doesn’t mean you need to know what to do with it. LLCs have a manager role — a person who handles the company’s day-to-day operations. All LLCs are required to have at least one manager. They can be the owners themselves or other outside persons or businesses.
Two types of LLCs exist:
A member-managed LLC is managed jointly by all of its members.
A manager-managed LLC is managed by one or more — but not all —members or by separate (non-owner) managers.
THE BIRTH OF THE LLC
The LLC didn’t come out of nowhere. Business entities with the same characteristics as LLCs have been around for many years. The origin of LLCs can be traced back to 1892, when German law enacted the Gesellschaft mit beschränkter Haftung (GmbH) — a modern-day variation of the English private limited company.
Germany’s GmbH format was copied throughout Europe and Central and South America. This concept remains popular in many parts of the world.
In the United States, limited partnership associations actually predated the German concept. These entities were formed in several Midwestern states starting as early as 1874. However, this entity structure soon fell out of favor. The LLC was born in Wyoming in 1977 and modeled after the German GmbH and the successful Panama variation. LLCs didn’t become popular nationally until 1988, when the IRS ruled that LLCs could be taxed as partnerships. And the rest, as they say, is history!
If you are forming an LLC with only a few owners (members), and each owner will have a say in managing the company, then you may want to choose member management. However, if you decide to take on a silent partner who is not managing the business daily, your LLC needs to be manager-managed. All members, except for the silent partner, are listed as managers.
Remember Unless all members manage the company’s day-to-day business, your LLC is considered manager-managed.
Creating Your Own LLC: Your First Step Toward Success
You need to go through a few processes to get your LLC filed, structured, and up and running. You don’t have to be a lawyer or an über-savvy entrepreneur to get it right.
If you’ve listened to the radio or watched TV in the past few years, you’re probably well aware that filing an LLC is as simple as one low fee.
However, the important stuff comes before and after you call up a formation company or fill out a quick form and send it to the state. That’s where the big decisions come into play, and the real structuring of your company takes place. So, let’s get started.
Tip As you flip through this book, the concepts may seem overwhelming at first, but after you get familiar with a little bit of industry terminology, you’ll have a basic understanding of LLCs to get started on your own. See the glossary at the back of the book for all the need-to-know terms.
Educating yourself
The first thing to do is gain a little bit of education about LLCs. I know you’re busy, so this doesn’t have to be too extensive. You just need to know the basics, and the best way to start is by reading this book. Needless to say, you’re on the right track!
You can always use professionals to do the work for you. And that’s okay. Hey, I’m all for delegation! Just make sure that you have a basic understanding so you can have productive and educated conversations with the people you hire. Not to mention that you want to have an idea of whether they really know their stuff. (You’d be surprised how many don’t.)
Only after you understand the basics should you call your attorney or accountant and ask about details that pertain to your situation. You may also want to do some research online and set up some free consultations with corporate consulting companies. If you have specific questions on the formation of your LLC, you can ask my team and me directly at http://www.corpassure.com/, and we’ll get back to you as soon as possible.
Check it out LLCs, like most entities, are subject to state oversight. The problem is that not all states are on the same page. As much as I wish I could include information about every state’s laws, doing so would result in a page count rivaling War and Peace. (My wise editors at Wiley quashed that idea pretty quickly.) So, to make it easier for you to ensure that you’re complying with the laws of the state(s) in which you transact business, I provide state-specific information about LLCs and all state LLC laws on a login-only website, especially for Dummies readers. You can access it by going to http://www.corpassure.com/dummies and entering the password onesmartdummy. Along with these additional resources, this book should give you everything you need to get started on the right path.
Divvying up the ownership
When starting your business, it’s usually pretty clear who the owners will be. The real question becomes, how much ownership does an owner actually get? Sometimes, the answer is clear-cut, such as when all the owners contribute cash and nothing else (see the "Contributions: Where the money comes from" section earlier in this chapter). However, with most businesses, deciding who gets what isn’t easy.
Often, businesses are started based on just an idea and possibly some savings pooled together. Say three people are in a room and think up an idea, and all three people get excited and decide to pursue it. The first thing that often comes to mind is that all three will be equal partners. After all, it’s only fair, right? Each person is valuable and smart and equally excited as the others, so why not share the ownership equally? Right? Wrong. In my experience, misjudgments in structuring partnerships are the number-one reason a new business venture fails.
Ideas don’t really have much value — at least as far as the law is concerned. It’s the execution of those ideas that’s valuable. So, yes, your crazy cousin Joe might have been in the room when the idea was brought up and thrown in a few asides that got you thinking, but that doesn’t mean you need to bring him on as a full partner. In fact, there’s a good chance you’ll hate life if you do. You need to choose your business partners as carefully as you choose your spouse. Not only is there a very good chance that you’ll see this person as much as — if not more than — your spouse, but the success of your business rides on you and your partners making crucial decisions synergistically.
We entrepreneurs are natural risk-takers. You may encounter a situation where you have a good feeling about a partner and want to take a chance on that person. Luckily, LLC membership enables you to do so by using membership vesting. A potential partner can earn (or vest) their ownership upon completing certain milestones or a fixed amount of time spent with the company. Don’t be afraid to have these crucial conversations, and then go to Chapter 9 to find out how to structure the membership in your LLC in a way that promotes accountability.
Deciding who manages
If your LLC is a small business without investors, chances are it is a member-managed LLC, with all company members managing the day-to-day business equally. If you have silent partners or want to involve other non-owner managers, your LLC is likely manager-managed. This means one of two things:
Some, but not all, of the owners are also company managers.
An outside party (a person or company that is not an owner) is a company manager.
Technical stuff All is not always fair and equal in the world of managers. All forms of LLCs allow for management groups. When structuring your LLC, you can create groups of managers, with each group having a different, clear-cut scope of responsibility and/or powers to make certain decisions or take certain actions pertaining to the day-to-day business of the LLC. These powers include taking out leases in the company’s name, authorizing the company to take on debt, and hiring and firing employees.
Now, hearing the word manager probably brings you back to your first job slinging pizzas after school … and that pock-faced 18-year-old manager
looking over your shoulder the entire time. But when it comes to LLCs, these low-level employees are not technically managers in the sense that we’re talking about here. Managers are the ones fully running the company, making the make-or-break decisions. They’re the ones who cosign the business loans and leases, for example.
Regardless of how your LLC is structured, I always recommend that a business have a clear leader when there are multiple managers. If not all the managers are willing to get on board with one leader, then at least make sure that their duties are clearly delineated. Isolating each manager’s realm of authority early on saves you a lot of future headaches over disagreements. You draft this delineation of duties in the LLC’s operating agreement, and it becomes a set part of the LLC’s structure that can be changed only by written agreement of the company’s members. I will show you how to do so in Chapter 9.
Technical stuff Although not super common, an LLC can also adopt the fixed management structure of a corporation — with a president, secretary, treasurer, and board of directors. This structure can be useful if you are in an industry or have an investor that is more comfortable with those common titles. You elect a corporate management structure in your LLC’s operating agreement.
Choosing your registered agent
Before you can file any formation paperwork for your LLC, you need to choose a registered agent and registered office (sometimes known as a resident agent or statutory agent or by its acronym RA). A registered agent (and its corresponding office) is a person — or, more commonly, a company — that serves as your legal office in the state where your LLC is registered. This office is always available during business hours, every single day, to accept formal legal documents for your company in the unfortunate instance that you are sued. It will have on file the addresses of the appropriate members of the LLC to which to forward this important documentation. Your LLC needs a registered agent in its home state (its domicile) and every other state where it transacts business.
Most registered agents allow you to use their office address for all your mail and other correspondence for an additional fee. A good registered agent should also stay on top of your state filings for you and help you make sure that your LLC remains in good standing in each state in which it is registered. This task can be onerous and important, so you’re better off leaving it to a professional service company or an attorney (a more expensive option). See Chapter 4 for more on using a registered agent.
Warning Even if your state allows you to serve as your own registered agent, I don’t recommend it. Unless you plan on being at your office during business hours every single day, without exceptions, and you have a good grasp of all the state filings that need to be done, I suggest leaving it to the pros. If you are unavailable when a lawsuit is served, you could lose the case by default — without knowing about it until it’s too late! Another consideration is that if you were sued, would you really want a process server or sheriff serving you a lawsuit in front of your customers? I wouldn’t!
Bringing your LLC into existence
After you decide on a management structure for your LLC (member-managed or manager-managed) and on a registered agent, you are ready to file your LLC. Your LLC needs to be registered and receive approval in any state in which it is transacting business. Your LLC doesn’t need to reside in the same state as you — it should reside wherever its headquarters will be. A company that doesn’t have a headquarters (like a purely Internet-based company) should reside wherever the tax laws are most favorable.
If you don’t go through a filing company to file the initial paperwork for your LLC, you can create your LLC yourself by drawing up a short document called the articles of organization. Your articles contain such basic information as the name of the company, how long the company will exist, the initial members or managers, and the name and address of the company’s registered agent. In Chapter 5, I show you how to put together your articles of organization. After you’re satisfied with your articles, you file them with your local secretary of state’s office (or comparable state agency).
Technical stuff In most states, the document that you use to file your LLC is called the articles of organization. However, some states refer to it as the articles of formation or certificate of formation.
Operating Your LLC
After you form your LLC, you’re ready to start business operations, right? Not even close. Actually, your work has just begun. After you’re registered, you still have to complete the formation of your LLC by creating your operating agreement and making some very important decisions. Luckily, you can handle most of these things while you’re waiting for your filed documents to come back from the state, saving you time.
Operating your LLC is meant to be easy. Historically, the courts have become much easier on LLC owners who forget or fail to document something in writing. LLCs aren’t like corporations, where a single misstep in following formalities can cost you your limited liability protection. Although this paperwork isn’t nitpicked by the state statutes like corporation paperwork is, you still need it to maintain separation. Also, you can save yourself a lot of time, hassle, and potential legal battles by getting it out of the way and making your agreements as tight as a drum.
Creating your operating agreement
Think of your operating agreement as a sort of partnership agreement, except with much more power. Your operating agreement is the blueprint for your company. In it, you state your company’s policies on important matters, including
How will the company be managed, and by whom?
How will important decisions be made?
How will