Look, I know that you want to save money and do it yourself. But this may be penny-wise and pound-foolish; there are nuances and details you may miss. Think about engaging a lawyer.
There are lots of different types of entities and lots of different states. We’re going to stick to limited liability companies, for now, as most new entities are LLCs. We’re also going to stick to New Jersey, as that’s where I usually sit.
From Soup to Nuts
There are five basic steps that should be taken in setting up an LLC:
- Tax ID
- Operating Agreement
If you feel uncomfortable doing any of this, consult a lawyer. (That’s what we’re here for.) In any event, I would highly recommend having a lawyer prepare your operating agreement.
First you’ll need to pick a name for your LLC.
Your name is something indicates that identifies and distinguishes your goods or services. It’s your brand.
It’s beyond the scope of this post to go too much into the details of trademarks and tradenames. Generally speaking, if you wish to have trademark protection for the name of your LLC, you need to avoid names that are purely generic names, such as Computer, or descriptive names, such as Teledoctor. You can combine these words with other words and probably get protection.
Ok, pick a name.
Then Google it to see if anyone else is using the same or similar name. Even if they are, you may be able to use your pick, if you’re in different markets or supplying different goods and service.
Next, check the name at the United States Patent and Trademark Office.
These are good starting points. But they may not be enough to fully show whether others are using the same or similar names. So, think about hiring a service to do a more comprehensive search and a lawyer to evaluate the search. These services can search all fifty states’ filing offices, and all sorts of publications, including ones you’ve never heard of.
Now, grab your credit card and your web browser and head over to the NJ Business Gateway Services. Answer some simple questions, pay your fee and you’re set. You’ve formed an LLC.
The Tax Identification
Next, surf over to the Internal Revenue Service site and get a tax identification number or EIN. No charge for this. (I guess the IRS actually wants you to pay your taxes.)
In New Jersey, you must register your LLC in addition to forming it. Go to the Online Business Registration Service and be prepared to answer a series of questions about the business of your LLC. You’ll also need your EIN and the 10 digit number you received when you formed the LLC. (You can do the registration by snail mail, but why bother?)
If you’re a single member LLC, you don’t need an operating agreement (at least, at first). Otherwise, you do.
The New Jersey statute on limited liability companies provides default provisions on how an LLC is run and the relative rights and powers of its members (owners). More than likely, these provisions will not reflect the understanding of the members or their needs. You need an operating agreement to do this. And though the statute allows for oral agreements, the agreement should be in writing. As Sam Goldwyn said, “A verbal contract isn’t worth the paper it’s written on.”
Don’t cut corners. The operating agreement will govern your LLC; it will address capital contributions, distribution of cash flow, voting rights and management. It will tell you what happens when a member dies or when a managing member needs to be removed or replaced. It will limit transfers of membership interest and explain how to admit new members.
You may be tempted to same money by using online services or finding online forms or by cobbling an agreement together from found forms. This is not a good idea. Spending a little now may save you a lot later.
Any questions? Contact me.
– Alan N. Walter