Tuesday, March 4, 2014

LLC is as easy as 1,2,3,........4

If you are a nerd of the business world, then the history of the Limited Liability Company (LLC) is quite interesting. The first occurrence of this business entity worldwide was seen in Germany in 1892, back when Germany was under the rule of its last emperor, Kaiser Wilhelm II. Interestingly enough, the first time we see a US LLC pop up was in 1977, in Wyoming of all places!?!?  Wyoming wanted to stimulate growth in its economy, so it created the LLC specifically for a Texas oil company. And the rest is history….

But screw Wyoming, let’s talk about Colorado. Many of the specifics of the LLC are shared by multiple states but there are intricacies and fine print stuff that set Colorado apart from other states. The rules of LLCs are governed by states, not the federal government, just FYI. In Colorado, the Secretary of State (SOS) administers and oversees LLCs. They are the department that you will file all paperwork to initially and through the life of the business. (And I just found out filing the paperwork is literally all they will do. If you have questions about the Colorado Revised Statutes regarding LLCs, you will have to talk to a lawyer as the people answering the phones are basically robots with no souls.)

Oops, I said it, that dreaded paperwork word that usually paralyzes most people, and keeps lawyers driving Ferraris. But after reading this post, you will no longer feel daunted by the process of protecting and legitimizing your business as an LLC. Let’s get started…

Investopedia defines an LLC as “essentially a hybrid entity that combines the characteristics of a corporation and a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of a LLC is a feature of partnerships.” I have identified four main steps you need to take to create an LLC, and then there is a small fifth step you need to take annually to keep the company going.

The first step is pretty intuitive; you need to have a name. In your name you must contain the words or abbreviations LLC, ““ltd. liability company,” “limited liability co.,” “ltd. liability co.,” “limited,” “l.l.c.,” “llc” or “ltd.,”Limited Liability Company," "Limited Company," or the abbreviation "L.L.C.," "L.C.," "LLC," or "LC." The word "Limited" may be abbreviated as "Ltd.," and "Company" may be abbreviated as "Co."” So there’s that. Your name must be distinguishable from other businesses on file. In Fort Collins I remember there was a whole debacle about a business that currently is in operations called The Buttercream Cupcakery who was suing another business for a very similar name. Also, there is a jeweler called Pandora, which would be interesting to see if the music streaming service had any beef with. For $25, you can reserve a name with the SOS for 120 days if it is available and you are not ready to file your articles of organization.

Moving on, the second step is to file your articles of organization with the SOS. Your articles of organization will include the name and address of the principle business. It will also include the name(s) and address(es) of those involved in forming the LLC, and whether it will be run by a manager or members. Lastly, you must give the name and address of your registered agent. A registered agent is a place where the state can deliver notice of lawsuits or other legal matters should the need arise. In Colorado, your registered agent can be you and you can put your house or your place of business as the address. However, I have read that it can be advisable to not go that route and instead pay a registered agent company to handle that stuff for you. The reasons are that registered agents are public info, so do you want your home address on the SOS database? Additionally, if you operate a retail environment, do you want your employees and customers see you get served a lawsuit? Some things to ponder….

The next step is to create an operating agreement. This is the most paramount part of forming an LLC as it can make or break you throughout the life of your business. In Colorado, an operating agreement is not mandatory, nor do you have to file it with the SOS. In some states, you do. Colorado and many other states have default operating agreements the courts and arbitrators will use if you do not have one. That’s great and all, but it may not be what you want and you could be legally bound to it. For examples, the state default is that profits and losses will be divided up by the number of members. If not all members worked the same amount or invested the same then that is total BS.  It is advisable to hire a lawyer or accountant with this part. This is because the operating agreement protects your liability an LLC. A court may rule that you as a single member or multi-member LLC are not operating as an LLC if you do not have all the aspects of an LLC, and you may lose your personal liability protection and be classified as a sole proprietor or a general partnership, respectively.  Here are some commonly defined terms that make up an operating agreement, although you can customize yours to say exactly what you want:
·         % interests
·         Rights and duties
·         Voting
·         Allocation of profits and losses
·         Management
·         Holding meetings
·         Buy-sell provisions

The final step in creating an LLC is to learn about your tax requirements. If you are a single member LLC, your Social Security Number will be enough to identify you to the IRS. If you are a multi-member LLC, you will need to get an Employer Identification Number (EIN) with the IRS. No filing fee for the EIN. Yay!!!!! When it comes to be tax time, as a single member LLC, you will go ahead and report your business incomes and expenses on a Schedule C form which is pretty simple honestly. If in a multi-member LLC, you will file one IRS Form 1065, and then distribute a Schedule K-1 to all members which shows their share of the profits or losses to be used on their own tax return. 

And that my friends, is how you create an LLC! The fifth step is very simple. Every year, you update the name and address of your business, as well as your registered agent. That’s it. You don’t have to have annual meetings and take minutes or any of that corporate BS. But make sure you do file the annual requirements because you want to keep that liability protection!!! This is meant as a guide, please don’t take it as gospel. I have neither a JD nor a CPA, I just happen to know a thing or two about this stuff.


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