LLC Resource Center
"Setting up an LLC can be a valuable protection for your personal assets. However, you need to do it right and complete the entire process. If you don't, you could loose the very protection you were trying to get."
“Thank you very much for your wealth of information in helping us start our LLC. Your fast response and easy format were truly helpful to use. Many Thanks."
Paul Shinn - Real Estate Investment
P.S. We have been telling our friends.
Step 1 - Choose a Name and Check It's Availability:
"Bob - I don't think you could make this any easier if you tried. One fax and I was done. I appreciate the stress free service. It's a pleasure to pay the bill."
Ryan & Son, LLC
“I’ve been referring my business clients to the Law Offices of Robert Montgomery, Chtd., for over 10 years. Their knowledge of the incorporation process and the speed and efficiency with which they get the job done keeps my clients and me happy. I highly recommend their service to any new business .”
David Johnson - CPA
Recent Articles About LLC's
Once you have decided to set up an LLC, you need to choose a name.
Almost any name will work so long as it is not the same or deceptively
similar to a name being used by another entity that is filed with the State
Filing Office which is usually the Secretary of State's Office. (If you need help on deciding which state to file in) READ THIS You can check online to to see if the name you want is available by clicking the link below and doing a search of names in the state you intend to file in:
SEARCH NAME AVAILABILITY
The name must end with the words Limited Liability Company or an abbreviation such as LLC or L.L.C. For example, you could have Jones Plumbing, Limited Liability Company or Jones Plumbing, LLC. The ending such as LLC or Inc is not considered part of the name when searching for availability. (back to top)
If you need help getting
your LLC filed - click here
Step 2 - File Articles of Organization with State:
The first official step in setting up an LLC or limited liability company is to file Articles of Organization (sometimes called a Certificate of Organization) with the State Filing Office which is usually the Secretary of State and pay the required filing fee. Almost everyone uses the form provided by the State Filing Office to file for an LLC.
In most states you can now file online. You can also mail the form to the Secretary of State together with the filing fee (or) deliver it in person to their office.
Important Note: A lot of people think this is the end of the process.
However, that can be a costly mistake. To fully complete the set up and organization of your LLC, you need to follow the rest of the steps outlined below. If you don't, then the limited liability protection provided by the LLC may be at risk.
Another Important Note: You are required to name a registered agent and list a registered address in the Articles of Organization. A registered agent is simply a person or incorporated company who can accept service of legal papers if your company is sued or the person who can receive mail from the State Filing Office about your company. You can use one of many different companies that provide this service but they will charge an annual fee of $100 to $200.
You can also act as your own registered agent and this is commonly done. There is no additional cost to you when you act as your own registered agent. However, the address you use must be a street address and not a P.O. Box. (The address you use does not have to be your business address, but should be one that you are frequently at) The address you use is important because you want to make certain you receive papers that are served or sent to your company so that you can take appropriate action to deal with it. (back to top)
Step 3 - Prepare and Sign or Adopt an Operating
Once the Articles of Organization have been filed, the organizers of the LLC should prepare and sign or adopt an Operating Agreement. This is not required by the state but is one of the most important steps in maintaining your liability protection and preventing disagreements between the members.
The Operating Agreement is an essential document which sets forth the rights, duties and obligations of the members of the LLC. It also sets forth whether the LLC will be managed by the members (owners) or by certain other individuals or entities. Furthermore, the Operating Agreement usually establishes the ownership percentages or sharing ratios between the members of the LLC and will set forth such things as the division of profits and the distribution of income.
In addition to acting as an agreement between the parties involved in the LLC, the Operating Agreement also strengthens your limited liability protection in the sense that it shows you have completed the organization of the LLC and are in compliance with the process. It helps demonstrate that your LLC is being operated as a separate legal entity. This is true even though you may only have a one member LLC.
The State Filing Office usually will not provide Operating Agreements. This is something you have to do. You may find some samples online but you need to be careful with boilerplate agreements. You can obtain a form used by many attorneys to prepare an Operating Agreement by clicking the link below. (back to top)
CLICK HERE TO LEARN HOW TO GET AN OPERATING
AGREEMENT THAT IS USED BY MANY ATTORNEYS
Step 4 - Conduct Organizational Meeting
and Prepare Minutes:
The shareholders and directors in a corporation traditionally hold meetings and prepare minutes of meetings. These are often referred to as the corporate formalities. One of the benefits of an LLC is that there is no legal requirement for the LLC to hold meetings and prepare minutes of the meeting. However, it is still a wise business practice to document important business decisions. In addition, it helps demonstrate or prove that the LLC is being operated as a separate legal entity.
It is especially important to have some form of organizational meeting soon after the initial Articles of Organization are filed with the secretary of state. Typical minutes of an Organizational Meeting would include such items as the approval and ratification of the Articles of Organization and the Operating Agreement. Other important provisions include a statement concerning who is managing the LLC and each Member's percentage of ownership in the LLC.
CLICK HERE TO LEARN HOW TO GET SIMPLE INSTRUCTIONS
ABOUT HOLDING AN ORGANIZATIONAL MEETING OF LLC MEMBERS
I am Often Asked, What Types of LLC
Information Should Be Written in Minutes?
We are not talking about the day-to-day or ordinary business of the company but rather more important or unusual events that are not in the ordinary course of business.
The following is a sample list of examples of some of the types of action or information that might commonly be included in minutes:
__ Election or appointment of managers or officers and directors
__ Determination of value of membership interests
__ Employment agreements and special compensation arrangements
__ Basic details of control agreements and buyout agreements
__ Declaration of dividends to shareholders
__ Authorization to use a particular bank as depository of corporate funds
__ Bank signature cards
__ Bank resolutions and lines of credit
__ Use and compensation of professional advisors such as accountants
__ Authorization for new or additonal members
__ Authorization for loans to managers, members, employees or third
__ Authorization for loans from managers or members to the LLC
__ Authorization for lease agreements
__ Major purchases of land, buildings, equipment and other businesses
__ Amendments to Articles of Organization or Operating Agreement
In addition to the above list, it is advisable to have the minutes set forth contemporaneous reasons for major actions taken or policies adopted such as:
__ Explanation of why manger/officer/employee salaries should be raised
__ Why a distribution of income was or was not made
__ Why a particular acquisition was or was not pursued
__ Why a particular piece of property or equipment was purchased
__ Nature of negotiations for the purchase or sale of the business
__ Why a certain employee was terminated
This may all sound difficult but it is really not that hard. In reality, most smaller companies may only have a few sets of minutes each year. A simple way to handle this is by getting a written consent or agreement for action signed by all of the members or managers and this will normally take the place of a meeting.
This document can have different names but is commonly called a "Memorandum of LLC Action" or a "Consent in Lieu of LLC Meeting." This allows you to conduct company business without a formal meeting and greatly simplifies the preparation of minutes. You can get a form used by many attorneys to prepare minutes or a consent in lieu or memorandum of agreement by clicking the link below. (back to top)
CLICK HERE TO LEARN HOW TO GET A FORM USED BY MANY ATTORNEYS FOR MINUTES OR A CONSENT IN LIEU OF MEETING
Step 5 - Prepare Written Documentation
of Ownership Interests in the LLC:
A corporation is owned by the shareholders who each own a certain number of shares in the company. The terminology most commonly used to describe owners in an LLC is a Member and their ownership interest is referred to as a Membership Interest. A Membership Interest may consist of any number of units of the LLC. However, the most important concept is that Membership Interests are usually described as a percentage of the whole (which is 100%) or as a sharing ratio of the whole.
The most simple way to describe Membership Interests in an LLC is the sharing ratio. For example, if a certain member of the LLC owns ½ of the LLC then the sharing ratio would be 50/100. If he/she owns ¼ then the sharing ratio would be 25/100.
It is important to document or put in writing a member’s ownership interest in an LLC for several reasons. First, membership interests determine certain legal rights such as voting rights and may be important for making distributions of income. Obviously, if you have a one person LLC, this issue becomes less important.
With respect to liability issues, if you have not documented ownership of the LLC, then a question is raised as to whether you are really operating as a separate legal entity. In other words, a legal entity like a corporation or LLC cannot exist and function without owners. A second reason is to avoid disputes between owners and possible breakups due to disagreements over income, management rights, etc.
The primary written authority or documentation for a Membership Interest is usually found in the initial organizing minutes of the LLC or in a special agreement between the members. A common way to do this is to prepare minutes of an organizational meeting or a written consent of members setting forth the sharing ratio of each member and then attach an exhibit to the Operating Agreement which clearly sets forth the sharing ratio of each member. Click below for a sample set of minutes and written consent of members used by many attorneys.
LLC certificates (similar to stock certificates) are not required but can be used and are helpful to document the ownership interest and sharing ratio of each member of the LLC. Tip: Most office supply stores sell blank stock and LLC certificates that you can fill in.
I have seen many disputes arise in smaller companies when one of the partners wanted to leave or sell his/her interest and the parties had never really documented what each of them owned or what each of them started with as far as an ownership interest. Memories tend to dim and people often have a different perspective as to what they have put in or contributed to the business. (back to top)
Step 6 - Obtain a New Employer ID# (EIN)
from the IRS:
This is fairly self evident but each separate legal entity requires a new or different federal tax identification number (EIN) from the Internal Revenue Service (IRS). This is true because the entity is considered separate and apart under the law from the individual owners. The exception to this with LLC’s is when you have a one person LLC. When an LLC is owned and operated by just one person, that person has the option of reporting taxes on his/her own social security number or obtaining a new EIN #.
If a new EIN# is required then you need to file form SS-4 with the IRS. You can get the form from a post office that has tax forms, from an accountant or you can now apply online. Online is probably the easiest and fastest way to get a new EIN#. The internet link to get the online form form is:
You can also get some information and help online on the same page as the form. Just click on EIN help at the top of the online page. (back to top)
Step 7 - Set Up A Separate Bank Account for the
This is essential. A lot of people I work with wonder why they can’t just continue using the same bank account they used before for the business when they were a sole proprietor or partner. Again, the principle behind liability protection is that the LLC is a legal entity, separate and apart from the individual owners. A separate legal entity requires a separate bank account.
If your business is ever sued, one of the important issues a court looks at in deciding questions of liability is whether the LLC owners have co-mingled their personal and business funds and assets. In other words, do the owners pay for personal expenses out of the LLC bank account or visa versa. Obviously, if you are using the same bank account for your LLC and personal needs, then you will be co-mingling the funds.
The use of a separate bank account and the paying of LLC bills only from that bank account and the paying of personal bills from a separate personal bank account helps prove or establish the existence and operation of your LLC as a separate legal entity.
This is also true of a one person LLC. Although a one person LLC may not require a separate EIN# as discussed above, it does require a separate bank account and it does require that the owner not engage in the co-mingling of funds or assets. Otherwise, a court may easily find that although you claim to be operating your business as an LLC, in reality you are operating the same as if you were a sole proprietor and there is no limited liability protection under the law for a sole proprietor or partner in a partnership. (back to top)
There are a few additional things you need to do to properly operate your LLC after you get organized. Some of these will have to wait for another time. However, there are two things that will almost guarantee the loss of your limited liability protection.
The first one has to do with running up debts in the name of the LLC without the intent or sufficient money (capitalization) invested in the company to pay the debts. In other words, if you intend to stiff creditors by running up debts in the name of the LLC but do not intend to capitalize or provide a way to satisfy the debts, courts may look at this as being fraudulent. This is a different situation from a legitimate business which incurs debts in the ordinary course of its business and is simply not able to pay them.
A second problem is the co-mingling of funds which we have already discussed to some extent above. If you pay your personal and LLC obligations out of the same bank account, you are co-mingling funds.
If you organize and operate your LLC properly, you are entitled to limited liability protection, which provides a shield between business debts or obligations and your personal assets. The principle is that the LLC is a legal entity separate and apart from its owners. If a legal action is brought against you, you need to be able to prove or demonstrate that you have operated the LLC as a separate legal entity. Since each case is decided on the facts particular to that case, there is no way to guarantee that a person will have the liability protection of an LLC. However, if you follow the steps outlined above, you put yourself in a much stronger position to insure the liability protection you want and deserve from your LLC.
- Full Article Starts Here -
This website is owned by Documents, Inc., and much of the information has been provided for the customers of Documents, Inc., by attorney Robert Montgomery. Mr. Montgomery has been counseling and incorporating businesses for more than 20 years. During that time he's helped set up more than a 1000 corporations and limited liability companies (LLC's). He's a former business owner himself and has been corporate legal counsel for numerous small business corporations. He's presented lectures and seminars on the benefits and procedures involved with incorporating or forming LLC's and how to operate them for maximum benefit. He is a respected member of the legal community and is licensed to practice law in three states. References will gladly be provided upon request.
However, neither Documents, Inc., nor any of its employees can provide legal services or legal advice. The information contained in this website is provided for general information only and should not serve as a substitute for legal advice from an attorney familiar with the facts and circumstances of your specific situation.
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Set Up An LLC in Seven Essential Steps
Attorney Bob Montgomery
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