1  Why Should I Trust This Guide?

Barry had worked in the paint store for a decade when its owner decided to retire. The childless owner had treated Barry like a son. Barry hoped that the new owner, whoever bought the small business, would keep him on but was shocked when the owner offered to give him the business. Overwhelmed with gratitude, Barry accepted on the spot. But as much as he knew paint sales and how to run the paint store, Barry had no clue how to operate a business. And he didn’t know to whom to listen or whom to trust.

Advice

If you’re starting a new business, especially your first business, get advice. Owning, running, and building your own business can be extraordinarily rewarding. You may fulfill your life’s dream. You’ll use all your gifts and talents to do what you know best for the greatest good of yourself, your family, your customer or clients, and your community. But running a business is also complex. You have a lot to know and do to make the business operate lawfully and profitably, no matter how good you are at your specific field or craft. So, get advice. But get sound, skilled, and experienced advice. Don’t listen to every Tom, Dick, or Harry who has an opinion on what you should do. Listen to those who have already succeeded at business, while they learned from their own mistakes. And listen to professionals who have helped others succeed in business. Save yourself a ton of time and trouble.

Experience

Trust this book’s help with your LLC. I’ve been a lawyer for going on forty years, forming and advising dozens of LLCs, corporations, nonprofit corporations, and partnerships. I’ve also litigated all kinds of business entity issues in the state and federal courts, including withdrawal, dissolution, oppression, and liability issues, so I know what can go wrong. My law partners and I managed our own law practice through a special form of LLC for professionals, and I’ve operated my own LLC for property management, contracting, and publishing. I’ve also taught law courses at the nation’s largest law school, where I operated a nonprofit corporation clinic helping dozens of clients form entities through which to pursue their dreams. My published books, chapters, and scholarly articles have addressed business and corporate law issues. I have the experience to give practical and useful advice.

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2  What Is an LLC?

Doug, a 28-year-old tradesman, had worked for a friend’s dad since Doug got out of high school. He learned his trade on the job, for which he had a ton of gratitude. But for the past couple of years, Doug has felt that he could do better on his own. His friend’s dad hasn’t increased Doug’s pay as Doug has grown more skilled. When Doug asked him about it, he said that was all he was going to pay and that if Doug wanted more, he would have to go earn it on his own. Doug had seen other tradesmen go out on their own, usually with their own LLC. Doug thought maybe it was his time. But what was an LLC? 

Definition

LLC stands for limited liability company. A company is an artificial business entity apart from the individual or group of individuals who form it. An LLC is a special form of company that limits liability to the entity, protecting the company’s owners, but passes income through the entity straight to the owners. Owners form LLCs under state LLC acts. LLC acts state the laws that authorize and regulate LLCs to ensure that LLCs serve their purposes as an orderly form of organizing and conducting business. An LLC, once properly formed, has the attributes of a legal entity, able to contract, hire, buy, sell, and profit, much as an individual business owner would. Form an LLC, and you’ve formed a distinct legal entity with substantial interests and rights.

Origin

The concept of a business entity is ancient. As far back as Roman times, individuals joined together in partnerships, although the partnerships didn’t exactly have the character of distinct business entities. Medieval guilds and associations of tradesmen at times operated like business entities. Guilds pooled resources to train workers, organize work, offer goods and services, and set prices. Bringing skilled workers together around common interests made their work more efficient, sped technological improvements, and promoted business development. But guilds were not modern business entities. They were more like tight clubs.

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3  Do I Need an LLC?

Tom was beginning to think that his wife was right. It was time he opened a business checking account. Up until now, Tom had been running his paving business through the family’s checking account. Tom had a teaching job. His paving business was a summer sideline. But his business had grown from small jobs here and there to constant work all summer. So, down to the bank he went. And back home he quickly came. The bank wouldn’t open a business account unless Tom could show a legal document with the business name. The bank clerk had said something like an LLC.

Reasons

You may have several good reasons to form your own LLC. But why form your own LLC is a good question to ask. Know your reasons. Think of why you came to the question. Was it because you saw others whose success you admired operating their own LLCs? Was it because you went to the bank to open a business account, but the bank refused unless you showed them a business name on a legal document? If nothing in particular spurred your interest in an LLC, and you’re doing fine without one, then you may not need an LLC. The little time and trouble it takes to set one up, and the very little annual administration they require, won’t burden you enough to dissuade you. But don’t go to any trouble you would better avoid. That said, here are a few reasons for an LLC.

Banking

You may need an LLC for banking. Mixing your business deposits and payments into your personal account of deposits and payments can get messy. Having a separate bank account and statement for your business can simplify your business bookkeeping, so you can distinguish business income and expenses from personal income and expenses. But banks hesitate to open business accounts without a legal entity behind them. Banks have reporting requirements. IRS rules require banks to issue taxpayers a Form 1099 for interest income. Banks must also report cash transactions over $10,000 on Form 8300. Banks need legal names and numbers on their reporting documents. Banks generally won’t just open an account with a business name on it, without the business having a legal form and government-issued tracking number. An LLC is a solution. Show the bank your LLC articles of organization and EIN (see below), and you’ll be good to go.

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4  How Do I Plan an LLC?

The vision had hit Roger late one night. He suddenly knew the solution to all his problems: he just needed to start his own business. He had some vague ideas of what he wanted to do. But he figured he would just go ahead and get started. If he took it a step at a time, he was sure a plan would come together. Six months later, Roger looked back on all the time and effort he’d wasted. He’d run down so many dead ends that he was ready to give up. Instead, he finally took the advice of a wise old friend who had been the first to learn of Roger’s vision for a business. Roger sat down and wrote out a business plan. Then, he took the plan to his wise old friend to review the plan point by point with Roger. When they were done, Roger for the first time had a clear idea of how to go about starting his business. No more wasting time.

Planning

Planning is a good idea when forming an LLC to support a new business. There’s probably more to starting a business than you think. Things need to come together in order, step by step and with the right timing. Planning ahead means not having to do steps over again, fixing the mistakes you made that only show up later. Planning also means discerning in advance the advice, resources, and support you’ll need to make your business a success. Planning helps you research and reach out for that advice, those resources, and that support. Planning opens your eyes to both the opportunities and challenges of your business, so that you can pursue the opportunities and avoid or overcome the challenges. Do some serious planning. You won’t regret it.

Journal

Sure, the plans for your LLC are all in your head. It’s good to think about things. You’ll get productive insights at any time of the day or night. But write down your business ideas. Keep a paper or electronic journal in which you record your ideas as soon as you think of them. Writing ideas down helps you remember them. It also helps you evaluate them. That idea that looks brilliant in the middle of the night might not look so smart in broad daylight. But the bad ideas may actually be better for you than the good ideas. When you record all your ideas, good and bad, you can soon see the things to avoid just as clearly as the things to pursue. And avoiding the bad ideas may save you far more time, trouble, effort, and money than the good ideas help you pursue. Within a few days or weeks, you will have filled your journal with your own insights and wisdom. And anytime you find your planning stuck, just look through your journal. You’ll quickly get direction and inspiration once again.

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5  How Do I Form an LLC?

Martina felt like she was going in over her head. After all, she only had a pet-grooming business. Why would she need an LLC? But she was thinking of buying a mobile unit for her business. And she could even see leasing a storefront someday, where she could add retail sales to her pet grooming. She’d read that if she was going to sign leases and operate vehicles, she should have an LLC. So, she’d gone through the steps, one by one. When she was done, she was surprised at how quick, easy, and inexpensive it had been. Martina could already feel a new energy, and she also had a bunch of new ideas for her business.

Formation

As mentioned above, your state’s LLC act will govern how you form your LLC. Most states follow the Uniform LLC Act, especially as to these formation basics. You form an LLC by filing articles of organization with the state, under which at least one person becomes a member. Technically, filing your articles of organization with the state forms your LLC. But in practice, you must also promptly adopt an operating agreement, which you don’t file with the state but instead keep among your own business records. Your execution of those two documents, (1) the articles of organization filed with the state and (2) the operating agreement kept among your business records, form your LLC. 

Nomenclature

You might have already hesitated over the peculiar names of these two documents. They might sound both familiar and different to you. The articles of organization with which you form your LLC are very like the articles of incorporation with which you would have formed a corporation. And the operating agreement with which you complete your LLC’s formation are very like the bylaws with which you would have completed formation of a corporation. An LLC’s articles of organization have the same function as a corporation’s articles of incorporation. And an LLC’s operating agreement has the same function as a corporation’s bylaws. It’s just that the names are different. Get used to the different names. Articles form your LLC, and the operating agreement governs its operations.

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6  Who Owns an LLC? 

Ron’s accountant was his biggest supporter. They had been friends forever. But his accountant was more than a friend. To Ron, his accountant felt more like a business partner, for all the advice and help he’d given him. And so when Ron decided to form an LLC to expand his storage business, he approached his accountant about joining him. In the end, Ron’s accountant agreed to take a 10% interest in the business in exchange for helping with the down payment on another facility and for providing accounting services for free.

Members

An LLC’s members own the LLC. In the case of a corporation, the corporation’s shareholders are the corporation’s owners. An LLC, though, has no stock shares and so no shareholders. Instead, an LLC has members who own the LLC by percentage interests. You may be your LLC’s only member. You don’t need multiple members. Just as in the case of a corporation in which you own all the stock shares, in the case of an LLC you may own 100% of the membership interests. But you may alternatively make yourself a 50% interest owner and a business acquaintance a 50% interest owner. Or you may make yourself a 51% owner and your friend a 49% owner. Or you can divide membership up equally among you and nine investors so that you each have a 10% interest. Members own the LLC by relative percentage interests.

Percentages

Percentage membership interests make good sense for LLC ownership. In the case of a corporation, a shareholder might own 100 shares, 1,000 shares, or 10,000 shares, without having any idea how much of the corporation they own. In the case of a corporation, ownership percentages depend on the number of outstanding stock shares. A corporation might have 50,000 outstanding shares, 500,000 outstanding shares, or 5 million outstanding shares. Apple, for instance, has over 15 billion shares outstanding. You don’t know what percentage of a corporation you own without comparing your shares to the outstanding shares. In the case of an LLC, ownership is much simpler. The LLC simply states the percentage interest of each member, in an exhibit attached to the operating agreement. With an LLC, you know exactly what percentage interest you own, without having to find out any other information about shares. 

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7  Can Professionals Own LLCs?

Rupert had opportunities to join dental practices right after graduation from dental school. But his father had always had his own dental practice, and Rupert could see the advantages of practicing solo. He knew he’d need a business entity through which to operate his solo dental practice, and so he began investigating the proper entity form.

Professionals

Licensed professionals in certain professions owe special duties of loyalty to their clients or patients not to allow other interests influence their professional service. Physicians and lawyers are examples. They must not allow undisclosed others to direct their professional services to an individual patient or client. You might not want your mother-in-law directing your medical care or your creditor directing your legal affairs. Professions with these duty-of-loyalty concerns restrict professional practice ownership to the licensed professionals. Non-physician investors can’t partner with a physician in a medical practice. A lawyer, plumber, or electrician can’t partner with a dentist in a dental practice. Only physicians can join together to own a medical practice. Only lawyers can join together to own a law firm. In that way, these professionals eliminate the conflicts of interest that could arise from ownership or investor pressures.

PLLCs

To accommodate the special duty-of-loyalty restriction on ownership of professional practices, your state’s LLC act or other business entity laws may recognize a professional limited liability company (PLLC). More than half of states do, including New York, Texas, and Pennsylvania but not including California. In those states recognizing PLLCs, professionals all holding the same license may join together to form, own, and operate a PLLC. They may not allow any unlicensed individual to join them as members in their PLLC. A banker who wants to invest in a medical practice, for instance, cannot do so directly as an owner member. The banker could loan funds like any other lender but must not make contributions in exchange for a membership interest. If one of a PLLC’s licensed members loses their license, that member must withdraw from the PLLC. Also, no unlicensed person may provide professional services through the PLLC. Just because licensed members own the PLLC does not change the rules against unlicensed practice. Only the PLLC’s licensed members may provide licensed services through the PLLC. Check your state’s corporations bureau for the form for articles of organization for a PLLC, like the form at the end of this book.

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8  Who Manages an LLC?

Joanna and her friend were doing so well selling their homemade jewelry to friends around town that they decided to form an LLC together so that they could start making sales online. They needed a business entity to open an account for the online payments. When they sat down together to fill out the LLC documents, they realized they’d need an LLC manager. Joanna’s friend said she had no interest in all the details. She just wanted to make jewelry to sell. The two decided that Joanna would be the manager. Because Joanna was going to handle all the marketing and money, while still making jewelry with her friend, they decided that Joanna would own two thirds and her friend one third of their LLC’s membership interests.

Members

The Uniform LLC Act and state LLC acts patterned after it vest the management of an LLC in its members. Corporations have a board of directors elected by the shareholders. LLCs do not have a board of directors. An LLC’s members are themselves, in effect, the LLC’s board of directors. The members together decide how to manage the LLC, as the operating agreement may provide. The operating agreement may, for instance, require that a majority of members determine disputed matters or that a majority of membership interests determine disputed matters. If you intend to control your LLC by maintaining at least 51% membership interest, then ensure that your operating agreement provides for management by a majority of interests rather than a majority of members.

Manager

An LLC’s members may delegate management to a manager. Most LLCs do so. Corporations have officers including a president, secretary, and treasurer, elected by the board of directors. A corporation’s board may also employ a chief executive officer (CEO) to manage the corporation’s daily affairs. By contrast, an LLC’s members only select a manager to lead the LLC’s operations. Your LLC won’t need officers. Remember, an LLC is a streamlined form of business entity, designed to ease formation and simplify management and administration. The LLC’s manager in effect serves as the LLC’s president, secretary, treasurer, and CEO all in one, and in every other administrative capacity necessary for the LLC’s operation. If, as is typically wise, you decide to delegate management to a manager rather than have all members manage together, your articles of organization and operating agreement should so indicate. The example operating agreements at the end of this book designate managers.

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9  How Do I Operate an LLC?

Mark had his LLC all set up and ready to go. Then came the fateful day, his last day at work. It hit him when he woke up the next morning, realizing that he didn’t have to go to work. What was he to do now? How was he to turn his LLC documentation into a living, breathing business? Mark had a dream of establishing a sales business much like the one he had just left as an employee. But Mark was suddenly realizing that having a dream is one thing, while turning the dream into a reality is another thing.

Identifying

A first step in operating your LLC is to identify your business activities with the LLC, more so than with you individually. Of course, your LLC will in some respects carry or reflect your own individual identity, including your character, personality, commitments, and interests. But it is important that your business’s customers, clients, or patients understand that they are dealing with your LLC, not just with you. And so, your LLC’s website, business cards, email address, letterhead, print materials, contracts, and signage should all carry the LLC’s name. That prominence is why your choice of the LLC’s name is significant. You need it to convey your LLC’s identity, whether also your identity in part or the identity of the goods or service you provide, and manner, method, or location in which you provide them. Be thoughtful, thorough, and consistent in how you associate your LLC’s identity with its business activities.

Branding

You may, if you wish, think of identifying your LLC in its operations as branding. Your LLC’s business can benefit from a clear, positive, and memorable public presentation of its identity in its website, business cards, email address, letterhead, signage, and other communications. That’s the theory of branding, that consumers not only remember but also value the brand identity of a product and service. If you can create an impression of consumer value around your LLC’s brand, then you’ve added value to your LLC’s business. Branding can include not only the LLC’s name but also the font, script, color, position, and arrangement of the name and the design of associated logos. Once you have the brand identity, put it everywhere, not just on the marketing materials but also on the LLC’s goods, facilities, and vehicles. Branding can be valuable not only to you and your LLC but also to your LLC’s customers or clients.

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10  How Do I Finance an LLC?

Jack had worked for a pest-control company for years. But the ownership had changed hands, and Jack didn’t like the way the new owners treated the long-time customers whose homes and businesses Jack serviced. So Jack quit to plan his own exterminator business. He had to wait a year for his non-compete agreement to expire, but when it did, he was all set up with his new LLC. And Jack had spent the year quietly acquiring the vehicle, equipment, and supplies he would need to jump right into business on the one-year anniversary. Jack was surprised at the money it had taken to get started but glad he had found the sources.

Finances

Businesses generally require some amount of start-up finances. Nearly no matter what business you decide to conduct, you’re going to need at least a few things to get started, things that cost at least some money. Some businesses are notorious for needing substantial start-up capital. Other businesses have a relatively low entry threshold. Do some research into the average start-up cost in your field, before you plan and launch your LLC business. Make a start-up expense budget, and compare it to the average start-up costs in your field to be sure you’re being realistic. Then plan to raise the necessary capital. Don’t start your LLC without counting the cost. Otherwise, your LLC may fail for lack of financial planning and start-up resources.

Contributions

Member contributions are the primary source for LLC start-up costs. Many individuals who organize a new LLC have planned to do so for years, including saving for start-up costs. Other organizers of LLCs plan to recruit other members specifically for the capital they may bring, effectively as investors in the LLC’s business. The organizer may have the time, skill, and experience, while one or more members have no time, skill, or experience but available funds. Or the organizer may recruit LLC members who, like the organizer, have a healthy mix of funds, time, and skill to contribute. The LLC’s organizer may offer contributors membership interests in exchange for their contributions. If all agree, they execute the operating agreement indicating the contribution amounts, which the contributors may then pay into the business as promised and arranged.

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11  How Do I Limit Liability? 

Reese was deeply concerned. She’d learned that the other member of her PLLC’s dental practice had received a demand letter from a lawyer representing one of their dental patients, claiming that the other member had committed malpractice, seriously injuring the patient. The member had promptly turned the demand letter over to their malpractice insurer to respond. But Reese knew that she and the other member had only been able to afford the minimum malpractice insurance limits. Would she end up getting sued, too, and having to pay a big judgment out of her personal assets? 

Liability

An LLC can indeed be a significant tool to limit one’s liability. Liability simply means a financial obligation to another that civil law imposes as a consequence of a wrong of some kind. Liability isn’t necessarily a bad thing. We should be ready to compensate others whom we injure carelessly. What we shouldn’t have to face is unnecessary, excessive, uninsured liability that we could have avoided with reasonable and practical steps. An LLC limits an individual member’s liability by keeping the liability to the LLC and apart from the member. The LLC remains liable to pay for the wrong, but the liability does not pass through to the member. 

Procedures

Liability is an obligation arising and owed between private parties. The government isn’t directly involved in liability claims, other than permitting its civil courts to hear and decide the claims. Instead, the injured or aggrieved party brings the claim against the alleged wrongdoer. The claimant typically begins by having a lawyer serve a demand on the alleged wrongdoer to pay the liability. The defending party turns the demand letter over to the insurer for the insurer to either pay the claim or retain an attorney to defend it. If the insurer refuses to pay the claim, the claimant’s attorney may file a civil lawsuit and pursue the case through the court’s civil procedures to a bench or jury trial and civil money judgment. Insurance pays the claim up to the insurance policy limits, leaving the defending party to pay any amount owed in excess of those limits.

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12  How Does My LLC Contract?

The prospect of finally getting down to business excited Lee. But it also scared him. Lee had taken months of planning before he was ready to start his business. He had talked about his idea for an LLC with everyone who would listen. He had his LLC formed, his business plan, and his financing. His spouse had even asked him when he was going to get started. Yet something was keeping Lee from taking the plunge. And Lee knew what it was. He was scared to commit to anything on which he’d have to follow through. He was scared to sign a contract because he knew it meant that the excitement was over and the work had begun.

Commitment

You’ve seen that forming an LLC is relatively easy. Surprising as it may seem, forming an LLC also doesn’t come with any commitment. Search your state’s corporations bureau database, and you’ll see hundreds or even thousands of businesses. Not all of them are operating. Many of them are just placeholders, ideas for businesses that for one reason or another never got off the ground. Just because you’ve formed an LLC doesn’t mean that you must take the plunge into starting its operation. Indeed, if going through the planning process has shown you that you don’t have the stomach for it, then stop. Trust your gut. You may not have the right plan. You may not have the time, motivation, personality, discipline, or character. But on the other hand, expect to feel trepidation and hesitation. You’d be foolish not to do so. Take it a step at a time until you are confident that you are wise and ready to commit.

Contracts

Your formal commitment to operating your LLC comes with your execution of the LLC’s first contracts. Contracts are agreements or promises to perform. The promise on one side is typically to pay money and on the other side to supply a good or perform a service. Contracts can also involve exchanges of goods for goods, services for services, or goods for services, in what we sometimes call bartering. An executory contract is one in which neither side has performed yet but both sides have agreed to do so in an enforceable form. A promise to keep negotiating toward a contract is not a contract. The parties must agree on the contract’s essential terms, which typically include item or service, quantity or duration, price, and performance date or time. Color, material, quality, and other specifics may or may not be essential terms, depending on the product or service. Course of dealing or industry trade may fill gaps in non-essential contract terms, like manner of shipment, if the parties do not specify those non-essentials. 

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13  How Does My LLC Hire Employees?

Paul had everything in place for his PLLC to operate his new chiropractic practice. He was finally out on his own after years of working for another chiropractic group. But he hadn’t yet thought through how to hire the PLLC’s employees. He knew the administrative assistant whom he wanted to hire, and she had even agreed to the hours and pay. Yet what was his next step to actually get her on board?

Employees

Few business functions are as highly regulated as retaining employees. You, as the manager of your LLC, may have a great employee candidate with whom you have a great relationship of trust and confidence. Things may go swimmingly for as long as your LLC employs the employee. But your LLC’s employment practices and policies must still meet a thicket of laws, rules, and regulations. Forming and managing your own LLC is not hard. But employing employees can be quite complex. And the risks of doing it wrong are considerable. 

Contractors

Ensure that your LLC needs employees before you hire them. You might find that you are able to retain independent contractors instead, saving yourself the time, trouble, effort, and expense associated with employees. Don’t, though, hire employees but call them contractors, denying them the required compensation, benefits, and protections of employees. If you mischaracterize employees as contractors to avoid legal obligations, you and your LLC can end up paying severe penalties and incurring substantial liabilities. The legal tests for who is an employee and who is a contractor depend on state law and the reason one asks, such as for withholding employment taxes, paying worker’s compensation benefits, and so forth. But control is the basic question. If your LLC is directing the worker’s time, tools, and methods, and has a hiring, discipline, and firing process for the worker, the worker is likely an employee, not a contractor.

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14  How Do I Manage LLC Finances?

Bert had gotten his LLC off the ground. For more than a year, he had been doing about as well as he could have hoped. But he also had the sense that he was missing something. His LLC was doing a lot of business. Yet it wasn’t generating the profit that Bert felt it could. And without that extra profit to reinvest in the LLC, improving its equipment and operations, Bert could see that he might be treading water for a long time. Bert also knew that treading water meant soon going under. He needed better insight into his LLC’s finances.

Finances

Business finances can be a mysterious thing. An LLC can generate a lot of sales but make little money. Members can contribute a lot of capital but see little return. Money is like water. It finds the lowest places to seep slowly or quickly out. The LLC manager who does not have a clear view of the LLC’s finances plays a dangerous game. Expenses can shoot up unexpectedly, just as revenue can fall off. A trend gone unnoticed and unaddressed can soon turn into an avalanche and then into a catastrophe. The signals to adjust may have been there all along, but without a way of recording, reporting, and monitoring the signals, the LLC manager has little chance for timely noticing and effectively responding. Give serious consideration to how you track your LLC’s finances. You’d be surprised how much trouble you can avoid and how much better you can do.

Budgeting

Budgeting is a key tool for managing your LLC’s finances. A budget estimates expenses against revenue for the month and year. Your estimates may be way off, but at least you have something to work from as a guide. Use benchmark data in your LLC’s field to estimate expenses and revenue. You should be able to find measures from various sources either locally or online. Adjust that data to your LLC’s peculiar circumstances. Do your best to project how you think your LLC should do. Make categories for every major expense such as employee compensation, employee benefits, facility lease, utilities, technology including website and communications, advertising, equipment, supplies, and any other input peculiar to your LLC’s field. Add up expense categories to estimate total expense and compare it to total revenue, to ensure that you can foresee a reasonable profit. Be confident you can make money, or reasonably adjust your expense and revenue estimates until you are.

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15  How Do I Pay My LLC’s Taxes?

June had loved starting her LLC. She loved having the identity, structure, and excitement of a business. She had done well, too, selling more of her craft products than she had expected. But along with the extra revenue came extra expenses ... and extra taxes. It was the taxes that really surprised and disappointed her. Without planning adequately to minimize those taxes and to estimate and prepay them, June really struggled to make her final tax payments. The experience shook her enough that she decided either to make significant changes or not to continue the business. She wasn’t going to go to all that time and trouble just to pay the government.

Taxes

Tax obligations can surprise new business owners. Consider your LLC’s full tax exposure when planning your LLC and budgeting to pay its expenses. Government agencies have unusual powers to enforce tax obligations, not just preemptive liens, penalties, and interest but also fines and even criminal charges for deliberate tax fraud and evasion. If an LLC manager cannot pay all obligations, tax obligations are generally a priority to pay. Paying the government first ahead of other creditors can be a wise strategy. But lawfully reducing tax obligations to their reasonable minimum can be even wiser.

Assistance

Given the tax delinquency and enforcement risks, LLC managers and members should get skilled and experienced tax advice and representation when necessary to ensure proper treatment of tax obligations. You or your other LLC manager may have the bookkeeping and accounting software, and consulting services, to properly manage tax obligations. If not, then bookkeepers the LLC employs or retains as independent contractors may have the training and experience to do so. Accountants have the formal education and certification to properly advise your LLC as to tax obligations or to handle their payment for you. Tax lawyers have the knowledge and education to interpret tax laws, advise LLC managers and members as to the proper treatment of tax obligations, and represent LLCs in resolving tax disputes with government authorities. Use your best business judgment to determine how to handle tax issues responsibly. Get qualified help when you need to do so.

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16  Whom Should My LLC Consult?

Robert had started his business right out of high school. He’d bought a junked tow truck, fixed it up enough to get it back on the road, and gone to work hauling vehicles for anyone who called. He didn’t know anything about business. But he was smart enough to ask. He sought free advice from attorneys, accountants, appraisers, auctioneers, real estate agents, bankers, and anyone else he met. Yet he also hired a young attorney right out of law school. Robert and the young attorney learned business together. The attorney helped Robert set up his LLC. Then he helped Robert lease a tiny shop inside a junkyard where Robert could keep his truck and sleep through the long nights waiting to make a tow. Then he helped Robert with employment contracts and handbooks. Then he helped Robert get state authority for long tow hauls. Within ten years, Robert was a huge success, owning his own tow yard, several trucks, his own home, and a vacation place up north. And the one thing Robert attributed his success to over anything else was his willingness to get the right help.

Advisors

Advisors can make the difference to your LLC’s success. Professionals of all kinds serve businesses. While those professionals generally charge fair fees for their services, their advice can be worth the fee tenfold or a hundredfold. They also give a lot of free advice. But more than the advice, professionals model and mentor sound attitudes, practices, and approaches for new business owners. The value to a new business owner retaining a professional is often more in the relationship and the confidence it instills than in the service transactions. With a team of skilled professionals available, LLC managers and members may attempt business initiatives they never would have otherwise entertained. And that courage and confidence may be worth every penny an advisor costs.

Networking

Make a deliberate effort to meet service professionals who could help you with your LLC, even before you need it. Professional networking groups and roundtables help new business owners meet professionals. You’ll find attorneys, accountants, real estate agents, insurance agents, advertising consultants, website designers, graphics designers, and other service professionals in those networking groups. But you can also meet professionals serving businesses through school alumni offices, churches and synagogues, community centers, charitable organizations, and other school, social, religious, and community groups. Or you can just stop in at service professional offices to introduce yourself, learn about their services, and get a business card. Build your professional network so that you have the help you need when you need it.

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17  How Does My LLC Profit?

Garrett was disconsolate. His LLC had another great year from the sales and revenue standpoint. His LLC’s revenue had grown yet again, as it had year over year since he began it five years earlier. Garrett had assumed that his LLC would soon turn a handsome profit on its own. But it had not, again this year. His profit was just enough to keep him going. Garrett resolved to find out what was going on. He didn’t want to work so hard for yet another year, only to find his LLC’s profits meager, despite growing sales and revenue.

Profit

Sales and revenue may seem like an LLC’s lifeblood. They are not. Profit vitalizes an LLC’s business. Profit is the excess of revenue over expenses. Profit means your LLC is making money. If your LLC is not making money, then it’s just spinning its wheels. And spinning wheels soon run out. Your LLC won’t be able to sustain operations and continue its growth without, at some point soon, turning the corner into profitability. Profit is the return that members receive for their contributions. Members who do not profit from their LLC’s operations should either fix the profit problem or move their contributions somewhere else where they can profit. That’s the nature of capital, to seek the highest available return. Profit is good for everyone because it directs capital to its best uses. Profit means flourishing. Loss means to do something different or do something else.

Formula

Given the definition of profit, as the excess of revenue over expenses, improving your LLC’s profit generally follows the straightforward formula of increasing revenue while reducing expenses. That formula can be a simple and effective guide. Look at your LLC’s financial statements, especially the cash-flow statement (P&L). Examine expense categories for areas where you might reduce those costs. Examine revenue categories for where you might increase those sales. Increasing profits doesn’t have to entail rocket science. When you identify an expense that might be more than your LLC’s operations require, walk around investigating. Ask personnel about whether the expense is necessary and how reducing the expense might affect operations. Contact the supplier asking how your LLC could reduce the supplier’s cost. Do the same on the revenue side, speaking with your LLC’s sales personnel and asking customers or clients what would entice them to use more of your LLC’s products or services. Follow the basic formula.

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18  How Do I Sell My LLC?

Gene had enjoyed his years sharing a real estate business with his friend. The two of them had formed an LLC together right after getting their real estate licenses. Over the years, they had gotten along great and done well. But Gene was frankly ready to move on. He had other things he wanted to do. Gene just wasn’t ready to walk away from his real estate business without some consideration for leaving it behind. Was it something he could sell?

Departing

You may come to the point of no longer wanting to continue your LLC business. Attitudes, interests, and relationships change. You may tire of operating your LLC, or its other members and personnel may tire of you to the point that you’d prefer to withdraw. Even if you don’t want to withdraw, you might come to the point of not being able to continue. Your illness, injury, or slow decline may bring you to the point of work ineffectiveness or even outright disability. The needs of a dependent spouse, parent, child, or other family member may require you to give up your LLC work. You may instead just find better opportunities elsewhere. You may just be one of those special individuals who are great at creating things but not so interested in sustaining things. Don’t hesitate to examine your interests in withdrawing from your LLC. Everything has a season. It may be your season for a change.

Value

Your membership interest in your LLC may have considerable value. Your LLC may have valuable customer or client relationships, valuable contracts with suppliers, and a valuable name, branding, and location, giving the LLC considerable worth as a going concern. While going-concern values are generally significantly higher than liquidation values, your LLC may alternatively have significant real property, tangible personal property, intellectual property, and other intangible but valuable interests and rights. Liquidation of those interests could result in considerable cash payouts to your LLC’s members in a dissolution. Your LLC may alternatively have a history of paying substantial distributions to its members, indicating the value of membership interests. Whatever is the case, you are fully within your rights and interests to determine whether you have something to realize from the sale of your LLC membership interest, once you decide to withdraw from the LLC’s business.

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19  How Do I Wind Up My LLC?

It was finally over after a good long run. Gert had kept up her LLC through thick and thin. Her LLC had been her one constant. It had provided her with not only a modest stable income but also with a reason to get up in the morning. But she was now on Social Security and had neither the need nor the energy to continue her LLC. How, though, was she to wind it up?

Grounds

Your LLC may conclude its operation for any number of reasons. Your state’s LLC act and your LLC’s operating agreement should provide for the voluntary and involuntary grounds for winding up your LLC’s affairs and dissolving the LLC. Those grounds may include that your LLC had only a defined period of duration in its articles of organization, although such a clause would be unusual. Most LLCs choose perpetual duration. More likely, the LLC or one or more of its members may reach the point of insolvency or bankruptcy. One of the members may die, fall ill, or insist on withdrawing for other reasons, leaving the other members unwilling or unable to continue. Your LLC’s operating agreement should provide for dissolution under those circumstances, while permitting remaining members to continue the LLC only if they wish to do so and are able.

Agreement

Perhaps the likeliest ground for dissolving your LLC is that your LLC’s members have all agreed that the time for dissolution has come. If all members agree, they don’t have to give any reason. Dissolution by member agreement is enough. Your LLC’s operating agreement may provide for dissolution not only by all members’ consent but alternatively by the vote of a majority of the membership sharing ratios. Better that all agree. You wouldn’t want to force a dissolution on a member with whom you have a valued relationship. But if the operating agreement so provides, and circumstances so compel, then a vote of majority interests is enough.

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20  What Else Useful Is in an LLC Act?

Fred, an engineer, was a stickler for details. He wanted everything in order with his LLC at all times, no questions asked. He found himself parsing his state’s LLC act for the little details here and there that kept his LLC’s filings and status in perfect order. Just like his professional services, he wanted his business to reflect his fine sense of detail, precision, and order.

Details

State LLC acts can run to dozens of pages of detailed provisions addressing a wide range of potential subjects helpful or necessary to the administration of your LLC. If you have a question having to do with your LLC’s administration, chances are good that your state’s LLC act addresses it directly or indirectly. Read the act online, and retain a skilled attorney to help you interpret and apply the law for your LLC’s benefit. Your state’s LLC act likely includes some or all of the following provisions, or similar provisions. 

Corrections

Your state’s LLC act likely authorizes you to correct inaccurate LLC documents and records filed with your state’s corporations bureau. You or your legal representative may make mistakes in the details of the articles of organization, annual reports, amended articles, and other LLC documents you file with the state. Proofread all documents carefully before submission. If you learn later that you or your legal representative have made a mistake, obtain the state’s form for correcting LLC document errors. You likely won’t be able to change the original document. But filing the error correction form with your state’s corporations bureau may have the same effect. See the example form at the end of this book.

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