We are a nation of do it yourselfers. This is true whether we are trying to fix the sprinklers in the yard or forming a business entity. Many people make a noble attempt to form their own limited liability companies these days, but then don’t have any idea what to do with the business entity once they’ve done so.
The limited liability company, “LLC”, is a very popular business entity given its ability to shield owners from personal liability for business debts while also providing a flexible tax structure. The entity is also highly prized because it is a cash cow for most state governments. In California, for instance, there is an $800 fee for the “privilege of doing business in California” that is tacked onto every LLC that is created although you do have a few months to actually pay it. While California is a terrible business state, most states add fees in one way or another to the LLC.
To entice the unaware, the states make the LLC the choice de resistance by often requiring only a pre-printed form to be filled out and mailed in. Some people will do this themselves while others will try to find a cheap online service to do it for them. The form is fairly easy to fill out. That is not the problem. The real problem starts when the forms come back approved from the relevant Secretary of State. Simply put, now what do you do?
The acceptance of the Articles of Organization by the Secretary of State means nothing when it comes to your LLC. It only means a shell entity has been created. You have no rights with this shell entity. Why? You are not an owner [called a “member”]. The perspective owners must by their way into the LLC. The rules for how the LLC is going to be managed also must be set forth in an Operating Agreement, a matter to be negotiated between the various entities. Issues such as voting rights, the right to bind the LLC to agreements, tax filing issues and so on must all be dealt with.
The vast majority of people get their approved Articles of Organization back from the Secretary of State and then do…nothing. This is a disaster! An LLC that does not have the proper internal documents will be set aside as a sham entity. Not only that, but you may be sued personally for fraud on various contractual agreements. If there is no paperwork establishing that you have the authority to bind the LLC to a contract, you better not be signing them in the name of the business!
Rick Chapo is with SanDiegoBusinessLawFirm.com - providing
single member LLC operating agreement and minute solutions to single member California LLCs.
