You could already have a Limited Liability Company (LLC) or you could just be setting up an LLC. You’re at the right place. All you have to do is follow the simple guidelines for this “LLC Operating Agreement,” and you’ll know more than many attorneys.
Yes, you need to know, because nobody is going to protect your assets like you, and the operating agreement is the key to setting up and operating an LLC that will actually protect you.
Setting Up an LLC
Setting up an LLC is fast and easy. All you have to do is follow a couple of steps. Most LLCs do not protect their owners, because the operating agreement isn’t done right and the whole LLC legal structure will fail. Make sure you lay a good foundation and get the protection you and your LLC deserve.
If you do your LLC properly it can give you great asset protection, more money and peace of mind. Just follow these steps.
1. Get your state’s Articles of Organization form, fill it out and file it with the state. The Articles of Organization forms are free on the state’s website.
2. Call the IRS and get and EIN. Then file with the IRS to choose your LLC’s tax status. Put your “start business date” as far out as you can.
3. Use my Operating Agreement Template to write a customized Operating Agreement, so you get the maximum tax benefits, asset protection and can use a system to keep up the “formalities” of your LLC.
4. Set up a Revocable Living Trust to “own” your LLC membership interests, so your company doesn’t have to be probated when you die. (Most attorneys miss that one.)
5. Cross the t’s and dot the i’s. Then use your LLC to make money, get the asset protection, and save a ton of taxes. Your LLC is your best tax shelter, if you use it right it is worth thousands of extra dollars in your pocket.
Articles of Organization
Whatever state you are going to do business in will require you to file your “articles of organization.” Once the articles of organization are properly filed, you’ll have an LLC. Don’t get fancy. Just use the state’s forms, and don’t give them any more information than you absolutely have to. (It’s public information as soon as it is filed.) Should you do your LLC in Nevada or some other sexy state? There are a few positives and lots of negatives. Don’t let them sucker you.
The operating agreement is the “guts” of your LLC. It’s the bible for operating your LLC. The operating agreement determines what asset protection you get, how much you save in taxes, and how you get attacked in court. A really good agreement can go 20 pages long, if you want to even start addressing all of the issues you really need to cover.
It will be the first document an attorney asks for when you get sued. The statistics are overwhelming that your LLC will be sued if you really do any business. It will be the document your estate administrators ask for. There are lots of issues that should be addressed in your LLC operating agreement. It really should be customized to meet your needs. (In my Complete Operating Agreement Course, I point out issues which can save your skin. Attorneys usually don’ care if you lose your skin, because they love to charge to clean up the mess.)
The standard internet deal is pitching to the lowest common denominator. Consider if you need more than the “lowest common denominator”
An LLC Operating Agreement Has to Have the Proper Elements, Or You Lose
There are specific legal standards your LLC operating agreement has to meet, or you don’t get any asset protection. For example, it can only have two of the four legal elements found in a corporation. If you have three, you lose. You won’t have a corporation and you won’t have an LLC. When you get into court, you’ll be a partnership, and you’ll be personally liable. That’s not good, and it all happens so fast.
You have to be able to read your operating agreement and figure out which two you’ve got. It’s sneaky, because most attorneys can’t tell. It’s all in the language. The attorney or internet site will say it doesn’t matter whether or not you are a member managed or a manager managed LLC. Oh, yes it does matter. Depending on which you chose, you’re picking one of the two elements or rejecting it.
Multiple Member vs. Single Member LLCs
In many states, single member LLCs have different asset protection laws than multiple member LLCs. The courts are attacking single member LLCs. In a half dozen states, a single member LLC will by its very nature cut your asset protection potential in half.
Florida is a good example. The Supreme Court there just wiped out a critical part of asset protection that single member LLCs used to supply. It’s just gone. The creditors of the members can come directly against the assets of the LLC in order to satisfy the debts of the member. (Check out the case SHAUN OLMSTEAD, et al., vs. FEDERAL TRADE COMMISSION, [June 24, 2010])
Spending the time to customize your LLC for asset protection will pay huge dividends when you get in trouble. Lots of people come to me and they are already in trouble. Because of the fraudulent conveyance laws, you can’t start moving assets around, but you can immediately beef up your LLC operating agreement and save a lot of assets.
Most people get the “default” tax plan the IRS assigns them. In fact, most people I talk to can’t even tell me how their LLC is being taxed. If taxes are going to take 20 to 40 percent of all the money you make in your LLC, wouldn’t it be worth honing your LLC to cut your taxes. It really is your most important tax shelter, because you can control your adjusted gross income.
You can’t work ten percent harder, but in a couple of hours you can customize your LLC operating agreement and do some tax planning to save ten percent of the money you make. Is that a good deal? What’s it worth to you? Put a number on it.
Your LLC operating agreement really is the heart of your company. An attorney may just treat it as a form document — same size fits all, but it really is important. It needs to address lots of issues. I’ve seen lots of 100 page operating agreements. That’s an over kill for most people, but the words on the paper mean a lot when the IRS and the lawyers come gunning for you. The words will determine your financial life in many cases. Do it right to start with!