Sunday, October 12, 2008

Do I need a lawyer to set up my LLC?

The correct answer is "that depends". Everyone prefers a straight up 'yes' or 'no', unfortunately, our laws come in shades of gray. Legal formation of an LLC is a relatively simple matter. The steps are outlined here. Or, if you prefer, there are services with reasonable prices that do LLC formation. Check out the ads on this Google query for a sample of incorporation companies. (One cavaet for Arizona, this state requires publication of notice of formation of the LLC.) For single member LLCs, one small but important item to keep in mind for single member LLCs comes when filling out IRS Form SS4 to obtain your federal employer identification number. For question 9a entitled "Type of Entity", check the first box "Sole Proprietorship" and give your personal Social Security Number. Why? This allows your LLC to be disregarded for federal tax purposes and, thus, removes the need to file a separate federal tax return for the LLC. Instead, the single owner of the LLC reports income / loss from the LLC on Schedule C of his or her personal IRS form 1040. If you don't know what I'm talking about, please consult with your tax accountant.

So you formed the LLC through the state and obtained an IRS tax identification number, what is left? For single member LLCs, maybe nothing. The last step is execution of an operating agreement. To my knowledge, only the state of Missouri requires all LLCs to have an operating agreement. See Mo. Stat. § 347.081. 1. Even outside of Missouri, it is common for single member LLCs to have operating agreements. Why should the sole member of an LLC have an agreement with himself? Typically banks and other financial institutions require LLCs to supply an operating agreement before they will allow the LLC to open an account. In the majority of states, this is the only document which positively lists all the current member of the LLC and their voting power within the LLC. If you are a single member LLC and the bank wants an operating agreement, any standard vanilla operating agreement form shall suffice IMHO. It's not necessary to pay an attorney $500, $1000 or more in these cases. Here is a link to the® LLC operating agreement. This document is created online by filling out a relatively simple questionnaire.

All LLCs with more than one member absolutely should have an LLC operating agreement. Don't rely on an oral agreement to delineate ownership interest, how the profits are to be split, what work each members shall perform for the LLC, capital contributions, the right to withdraw from the LLC, etc. Take the time to reach agreement on all of these issues among the members prior to launching your LLC. Is it necessary to get a lawyer to draft an LLC operating agreement? These can be complicated documents so it is recommended. Using a lawyer means you get a document that a lawyer is willing to stand behind as something suited to your needs containing language that has been explained to you. Downloading a legal form from the internet is quicker and much cheaper but comes with the risk that the document purchased does not do all you desire, that you don't really understand the provisions of the contract, or that there was some error in drafting. If your choice is download an LLC operating agreement from the internet or fail to have one at all, I would go with the online document. Check to make sure the company has been in operation for more than a few years, that the form templates were drafted by lawyers, and also whether any complaints have been filed against the seller with the BBB.

No comments: