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LLC Formation

I had a young man come in to help me with some of my internet marketing plans. He informed me that it was ridiculous to market tools to help people set up and operate LLCs. After all, everyone knows that forming an LLC is a piece of cake – form LLC by filing paper with state — end of discussion. I smiled and said nothing.

We described what we wanted on our internet sites, and after a little while he was obviously a little uncomfortable. I asked if he was ok. He said that his LLC only had one of all the LLC formation elements we were talking about, and he had drawn the conclusion from our conversation that his LLC form wasn’t going to protect him, give him tax advantages or anything else.

I nodded and said yup, “you’re screwed.” No operating agreement, no tax filings, no membership certificates issued, nothing. File the LLC form (articles of organization), and forget about everything else is really easy, but it does nothing to protect you.

How to Form an LLC

All of the “how to form an LLC” sites only get you half way there. Forming a LLC is a lot more then filing the articles of organization and even adopting the operating agreement LLC form. Of course those LLC forms are all necessary, but what do they actually say?

Filing the articles of organization with the state is the first step to forming an LLC. The articles of organization are pretty much set in cement. Just get the articles of organization LLC forms off your state’s website. Fill out the one or two page LLC form off the state’s site, and then file it and pay your money. Everything you need is on the state site.

Actually use the state site to form an LLC. They have all they want right there. Don’t give them anything more than they want. Everything is public when you form a LLC. Don’t ever disclose anything you don’t have to for the public to see.

Yes, once the articles of organization are filed with the state and you pay your money, you’re an LLC, once you get the LLC forms back with the state’s stamp on them. That’s just the first step to forming LLC protection.

The operating agreement LLC forms are the meat of your asset protection. What you say in the actual operating agreement makes a huge difference. One of the Six Mistakes on the videos is screwing up your operating agreement.

Most attorneys don’t understand the agreement, and the parts of forming an LLC that make it give you protection. They just use the stock LLC forms they got when they learned how to form an LLC in their first clerkship job.

For example, your operating agreement LLC form needs to talk about transferability of membership interests (stock). Certain language there has been held by the courts to prevent someone from coming in and taking over the LLC when one of the members gets in financial or legal trouble personally. Almost all the LLC forms I see just ignore the issue.

Once a good operating agreement is in place forming an LLC required some tax decisions. How will you LLC be taxed? You get to choose. You can choose to be taxed as a sole proprietorship (disregarded entity) if you are the only LLC owner. You can choose to be taxed as a partnership if there is more than one member. Whether you are the only member or there are multiple members, you can choose to be taxed as an S corporation or even a C corporation. You Choose!!

You have to file all the tax forms required to make you selection. One of the Six Mistakes Videos deals with forming an LLC and screwing up the tax elections.

LLC formation goes on. There are annual requirements that you need to follow in order to “maintain” you LLC. If these aren’t done right, forming an LLC won’t give you the asset protection you wanted.

My young computer geek friend was just sick by the time we got through with him. In fact, he offered to wave his nearly a thousand dollar bill if he could get the “full LLC formation package.” He could clearly see that there is a lot more to forming a LLC than just filing a paper at the state.