Do You Need a Lawyer to Create Your LLC?
Updated: Dec 14, 2020
Should I Hire a Lawyer to Start My Small Business? Maybe you don’t need a lawyer to start your company. You’re nervous about turning your idea into a business or you’re already working for yourself and want to formalize the venture. Taking the first steps to creating your company is simple.
How many people are going to be involved?
How are you funding the business and how large do you expect the business to grow?
What effect will this have on my tax filings?
To get to the point - if you are not planning to have any business partners or any investors, start an LLC. You would then be operating a “single member” LLC. The IRS taxes single member LLCs as a pass through entity. What the hell does that mean? You heard taxes and got confused. I know. Let's me clarify - income from your LLC ‘passes through’ the business and you claim the income directly on your personal taxes. paying taxes just as if you were receiving a paycheck from an employer. This simplifies your annual filings and still permits you to deduct allowable business expenses (focus on the ‘allowable’ part). In this scenario you can enjoy the “Limited Liability” protections without having to manage the more complex annual upkeep of a corporation. But maybe you have a business partner. In this case you still may want to form an LLC. Although other options may make more sense, such as a Corporation, or a LLP (Limited Liability Partnership). How you plan to grow the business may be determinative. If you are seeking investments or plan to add more business owners you may want to create a LLP or corporation. Both of these entities limit individual liability and financial obligations proportionately to your percentage ownership of the business. You won't personally be responsible for the entire debts or obligations of the company, but only relative to a percentage of your stake in the venture. If you plan to issue shares to investors as the business grows, a corporation is likely the best option. This will provide clarity and formalities to protect investors. You can also issue shares to raise capital. But corporations require additional annual formalities and bookkeeping obligations. Think about your business plan and decide if an LLC or LLP makes more sense. Sorting through these nuances and understanding your long term goals is important. If you are struggling to decide what form your business will take, contact our Firm to discuss your options. Don't Skip the Details Each state has an agency that registers and regulates businesses. In NY its the Department of Corporations, in PA its the Department of State and in Virginia its the State Corporation Commission. You’ll have to find the right state agency and forms, these are often called the "Articles of Organization / Incorporation". Filing the completed forms will likely cost between $100-$200 depending on the state. And depending on the state, you may have to publicize formation of your entity in a newspaper. Publishing is an old-fashioned requirement that most states have eliminated, however a few states still require 'publication' of the LLC in local newspapers. This can cost more than $500, in addition to state filing fees. Essentially, you are notifying the general public that you formed a new business entity. This is a hold-over from the days when everyone got their business information exclusively from newspapers. So - if you are forming a Corporation in Arizona, Nebraska, New York or Georgia, you will need to publish a formation announcement too. If you form your business in one of these states you utilize filing services and then file a form with the state as proof. It is important you complete this step - failure can undermine the legitimacy of your new business entity. Our firm works with several publishing companies to handle this formality quickly and at low cost. Avoiding Business Disputes Once these formalities are completed, you’ll also need to create an Operating Agreement or By-Laws. Many people skip this step because it is only for internal purposes and doesn’t need to be filed with the State. But this can be a fatal mistake. Even a solo business should have this on file. These will govern how your entity conducts business, such as keeping records, voting, financial reporting and who holds various positions in the business. Especially if you have a business partner(s) it is essential that you draft and abide by these rules. When you are first embarking on a venture you do your best to envision only growth and success. But laying the groundwork for sound book-keeping, annual reporting and tax filings and conducting formal meetings are important. When your business does face challenges or disagreements it will be vital that you have these practices in place to weather the storm. If a decision between partners or several members becomes contentious you want formal voting and dispute resolution procedures in place. You are destined to find friction when working alongside others and everyone will prefer clear rules for handling the matter. You do not want to have to figure out how to vote on a difficult decision, after you have already started arguing.
Your business will be much better served to set out written voting formalities and classes of shares or membership. Then you can look to your Operating Agreement and these procedures as you navigate difficult decisions. Too often a promising business venture unravels because eager business partners did not set out these ground rules at the start. Instead, when they encountered their first disagreement they could not work through it without derailing the whole project. Disputes are bound to arise. Ensure you have agreed how to resolve them beforehand. Operate From a Position of Strength Laying solid groundwork, with a comprehensive operating agreement, completing all of the state formalities and solid bookkeeping will allow you to grow your business quicker. In the larger picture these details may seem like a distraction. But, ensuring that your business is established on firm ground will help eliminate problems later. When you know that the details are secure you can focus on serving your clients and customers.
Whether you are trying to add members, seek financing, raise money from investors or expand, it is important to know that your business has sound practices and a firm foundation. Contact our Firm for a free consultation and to chart the best path for your next venture.