Some of you may remember that when I started DEL in 2007, it started out as a document preparation company. Here in Arizona, we have a Certified Legal Document Preparer Program that allows non-lawyers to prepare legal documents without being supervised by lawyers.
When I started out, I focused on helping people with the formation of their legal entity. I offered a package to form legal entities. It was easy, because that?s what I?d been doing at my big law firm job before I quit, and the legal stuff required for legal entities is statutory and straightforward. There isn?t much for an LDP to screw up on legal entity formation because the statutes were clear, and the filing information for corporations can always be fixed.
At least Arizona has a licensing procedure and LDP?s are somewhat regulated. The Arizona Bar Association isn?t happy about this, because they?d naturally like to be able to regulate non-lawyers the way other states do. They?ve even gone to the trouble of writing advisory opinions on the matter.
A lawyer friend told me once to stay away from estate planning, because you never find out about something you did wrong until someone dies. I also saw the Bankruptcy Trustees go after LDP?s who were charging in excess of $200 to prepare bankruptcy filings. No thanks! I would not have been an LDP in any other area of the law. I?m not an LDP now because the business model stinks. When the economy crashed, nobody was starting new businesses anymore.
Arizona may be criticized for a lot of things, but over-regulation by the state is not something I would complain about. The bigger problem for me has been other regulatory issues, such as the MARS Rule.
Anyway, I didn?t have a clue in 2007 about how to run a business, and I suspect a lot of people are in the same boat now that I was when I started my business, but don?t have any legal background.
Also, my stepbrother Matt asked me last week about forming a legal entity, which made me think about revisiting this topic. I hope this post helps clear up some of the confusion for you when it comes to legal entity formation, no matter where you are in the US.
1. Decide on an entity type.
Most of my clients overwhelmingly chose LLC?s over corporations because of the ease of managing these entities, and because of the expense. Corporations require ongoing yearly maintenance, filings and additional fees, which many viewed as a hassle and an unnecessary expense.
Ongoing expenses are a good reason to think about what type of entity you choose and where (See #2 for domicile). In many states, it?s cheaper to form an LLC to spare the expense of annual fees.
Use caution, however ? in some states, like Delaware, LLC?s are now required to pay annual fees. So, even though Delaware is a great place to form an LLC, especially if you want your personal details private, it comes at a cost. If you don?t live there, you need to hire a statutory agent for $100-$400 a year, and pay an annual franchise tax.
Keep these fees in mind, because you?ll have to pay them for as long as your business is in existence there. If you?re running a lean operation, these costs add up.
2. Pick a domicile.
You don?t have to form a business in a state just because that?s where you live. As I mentioned above, many businesses are domiciled in other places to take advantage of the business climate there.
For many people, their home state is probably okay. The savings of being your own stat agent may outweigh the costs of incorporation and annual fees in other states that you may view as more favorable.
For example, Arizona is inexpensive: for $85 you can form the LLC (that includes expedited service) and you don?t have to file anything yearly. We also have a publication requirement (check with your Secretary of State?s Office to see if there?s a similar requirement in your chosen domicile.) You only pay to make changes to the corporate structure and address changes.
Again, look at your state?s fees and take into consideration the ongoing expense ? if you know you aren?t going to be profitable in the first several years, it doesn?t make sense to spend the money to incorporate in a state with expensive annual fees.
3. Visit the Secretary of State?s Office or Corporation Commission?s Website
Most Secretary of State?s Offices have forms online that you can download and fill out yourself. Spend some time familiarizing yourself with the business filings sections so you know how much it will cost and which form to download. If you don?t send in the correct form or the right amount of money, your filing will probably be rejected.
It may be helpful to visit the SOS?s office in person if it?s near you. The Arizona Corporation Commission is always extremely helpful to filers in person. My office in St. Louis was two blocks away from the Missouri Secretary of State?s Office, and they were always very helpful when I visited in person.
The SOS can?t give you legal advice, but they can direct you to the form you need or tell you the correct filing fee. When in doubt, call or visit in person.
4. Talk to a Tax Professional About Your Tax Election
When I asked my brother which type of legal entity he was considering, he said, ?S-Corp.?
This brings me to a good point: a lot of people confuse their entity?s tax election with the legal entity type, when they are two separate things.
Your entity type (LLC/corp/partnership) is different than S-corp or C-corp. If you speak to a professional, you may confuse them when you refer to the entity type as a tax election.
And while I?m on the subject, tax elections are another point in this process where you should talk to a tax advisor. You can do some research on the internet, but after talking to my brother about some of the places he got his information, I told him he should just go to a tax pro.
There are time limits in which you can take some tax elections, so be sure to get some advice, BEFORE you file for your Employer Identification Number.
5. Get an EIN
You won?t be able to open a business bank account with an Employer ID Number. I suggest you WAIT to get the EIN until you receive your filing evidence from your Secretary of State. Plans may change ? my brother was thinking of forming a corporation but changed his mind at the last minute. If you get the EIN too soon, it?s a hassle to make changes later.
The IRS has recently simplified the online application for Employer Identification Number. As I mentioned above, I would speak to a tax pro BEFORE you apply for this number so you don?t give the IRS the wrong information about your tax election choice on your application.
One last thing I want to mention: BE SURE TO PRINT THE LETTER OUT FROM THE IRS AT THE END OF THE APPLICATION! It?s a major hassle to get a reprint of this, and you?ll need this letter to open your bank account and for just about every financially related issue that comes up. Put this in your corporate minute book and keep a scan of it somewhere so you have it forever.
6. Keep a Corporate Minute Book
There?s probably a lot of case law in your state about what happens with a corporation if there are no corporate minutes.
I used to give my clients a corporate minute book with their new legal entities. This was so they understood the importance of keeping good corporate records.
I would recommend keeping annual minutes even if you?re an LLC. The business world is litigious and I think keeping good corporate records is one way to demonstrate you?re serious about running your business as a business.
You don?t need a corporate seal or one of those brown fancy minute books. (I?ve never seen anyone actually use those seals anyway.) You can just get a binder from an office supply store and assemble a minute book yourself.
You can also purchase a set of tabbed inserts and create an index for your Minute Book. Here are the categories I always used for my clients:
1. Articles of Organization
Original and File Stamped
2. Affidavit of Publication (If your state doesn?t require publication, omit this tab)
3. IRS Form SS-4 ? Application for Employer ID Number
4. Employer ID Number Confirmation from IRS (Don?t lose this. Ever.)
5. Organizational Minutes
6. Operating Agreement
7. Membership Certificates
8. Other Related Info
7. If You Have an LLC and You Have Business Partners, Get an Operating Agreement
The Operating Agreement is something I never drafted unless an attorney was involved. I can?t stress the importance of an Operating Agreement if you have business partners. A business partnership is like being married, and if you?ve been married any length of time, you know how tough it can be sometimes.
Also, sometimes nasty things can rear their ugly head once you?re in the partnership. What if you just can?t stand the partner? Or you discover your business styles are completely different? How will you get out of that partnership?
One of the first LLC?s I formed wound up in litigation several years later when one of the partners found out the other partner was embezzling money. The partner who funded the business lost his entire business investment when the other partner embezzled it.
There are many issues that come up in businesses all the time, and a good Operating Agreement should cover many of the issues. I don?t think an Operating Agreement can cover all contingencies, but a lawyer can help you avoid the most common.
Each partner should get their own lawyer to represent their interests.
While working at law firms, I?ve seen some big players take months to negotiate these agreements. You probably don?t need a complicated Operating Agreement, but you should get some advice from a business lawyer who is experienced in these matters.
Sometimes, you just don?t know how things will turn out, and that?s why you need to plan for the worst, no matter how much you don?t want to think about it.
Like us on Facebook: FIN and DEL
Follow us on Twitter: Christine and DEL
tacoma narrows bridge weather nyc open marriage department of justice doj dept of justice weather chicago
No comments:
Post a Comment