A Simple DIY Guide to Starting Up an LLC

blocks-2bwblocks-2bwPlease note the “simple” in the title.

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:

  • Name
  • Formation
  • Tax ID
  • Registration
  • 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.

The Name

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.

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Business Succession

die_a_littleYou may have heard of this guy who lives used to live in my town Montclair, Yogi Berra. Yogi’s famously known for his words of wisdom, including:

“You’ve got to be careful if you don’t know where you’re going, because you might get there.”

Every business, new and old, needs to know where it’s going. Businesses can pivot all they want, but they still need to deal with succession. How can an entrepreneur or other person pass on his or her business or at the very least realize the value in the business?

It’s a classic problem. An entrepreneur works his or her whole life building a business. It’s very difficult for the entrepreneur to realize that it’s time to start transitioning the business, to support others in the running and further building of the business.

An owner who has failed to consider succession planning has not just failed him or herself or the business—the owner has also failed his family and his employees and his customers.

What is Succession Planning?

Succession planning can take many different forms. But there are basically four different options. The first is an internal succession plan with partners or key professional employees. The second is a merger with another firm. The third is the bringing in on a new employee or partner for an eventual buy-out. And the fourth, the least desirable, is the winding down of the business.

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Is Your Operating Agreement Complete?

bombYou and your partners are successfully running your business. After talking to your accountants and lawyers – I am always hopeful – you decided to operate your business as a limited liability company and entered into an LLC operating agreement.

This operating agreement governs your relative rights and obligations.

I’m fairly certain that your operating agreement addresses capital contributions, distribution of cash flow, voting rights and management. And it probably also addresses transfers of membership interest, the admission of new members and the exiting of existing members.

However, the agreement may be sorely lacking in other areas. Does it, for example, address:

  • what happens if a member dies, or becomes disabled
  • how membership interest is valued at various trigger events
  • the fiduciary duties of the managing members
  • how a managing member may be removed and replaced
  • the limitations or rights of a managing member to engage in outside business activities
  • the obligation, if any, of a member to turn over business opportunities to the LLC

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A Trap for New Business Owners: Piercing the Corporate Veil

bombAlan N. Walter –

Individuals, acting by themselves or with a group, are generally responsible for their actions; that is, they have general liability for their actions. By forming an entity such as a limited liability company or corporation, each individual in the group can shield himself from general liability, can limit his liability to his investment in the entity. The states permit—or even promote—this as a means of encouraging individuals to take risks and start businesses.

However, under certain circumstances, the limited liability of the entity can be lost; and general liability can extend to its owners. This is known as “piercing the corporate veil” or “piercing the entity veil.” As is the case with many legal issues, the reasons for piercing the entity veil are complicated and vary from state to state. To compound the problem, there are few statutes that govern this issue; individual state law is primarily derived from common law and court decisions.

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