Why does every LLC need an Operating Agreement?

In celebration of Women’s Small Business Month, we are continuing our series on Limited Liability Companies (LLCs) and how to protect yourself in business. If you missed part 1, click here…>, and for part 2, click here…>

Protecting yourself and your business is very important and should not be taken for granted. Members of The Mom Entrepreneur Online Support Group share their stories about running their business on a regular basis (e.g. trademark infringement and partnerships gone badly).

My company Bisson Barcelona, LLC was once a partnership with a very loose agreement drawn up by a lawyer. Unfortunately, the LLC was formed after we split. Having this document in place prior to forming this partnership would have helped settle many disputed that arose over the course of the partnership. Forming an LLC is well worth the time and effort to ensure you are protected.

Adam Bergman, Esq., president of myLLCagreement.com continues to answer our questions this week about why every LLC also needs an Operating Agreement.

TME: Why should every Single Member LLC (1 owner) owner have an Operating Agreement?
Adam: It is extremely important that you create an Operating Agreement to separate yourself as an individual from your LLC, even if you are the sole owner of your LLC. Without the formality of an Operating Agreement, the LLC can closely resemble a sole proprietorship, which does not limit your personal liability for business debts of the LLC. Without an LLC Operating Agreement, the basic operation of the LLC would then be governed by state law, which may not be advantageous to the LLC, it members, or the business it conducts.

TME: Why should every Multi-Member LLC (more than one owner) have an Operating Agreement?
Adam: The Operating Agreement governs the operation and management of the LLC. It describes the business and economic arrangement of the members (partners). LLCs need to document important and material issues that could impact the members, such as profit-sharing and decision-making rules as well as their procedures for handling the departure/addition of members, and the dissolution/termination of the LLC.

Without an Operating Agreement, the owners will be poorly-equipped to settle misunderstandings over the operations, finances, and management of the LLC. In addition, without an Operating Agreement, the LLC will be subject to the default operating rules created by state law.

The LLC Operating Agreement generally specifies, among other things, the business name, the official business address, the identities of the members, the way in which cash is distributed to the members, the way in which profits and losses are to be divided between the members, and how the company will be managed. The Operating Agreement should also reflect each member’s financial contributions to the LLC and the member’s ownership interests.

Thanks Adam! Don't forget about our contest, which continues until October 31st. MyLLCagreement is sponsoring a giveaway to win an LLC formation, an LLC Operating Agreement and $500 for your business!

Also, on Thursday, October 22nd, The Mom Entrepreneur will host a complimentary teleseminar with Adam: Protecting Yourself in Business - Why Every LLC Needs an Operating Agreement. You must register to be on the call.

About Adam Bergman:
Adam is the president and creator of myLLCagreement.com, the leading online provider of customized LLC Operating Agreements. He has worked as a corporate and tax attorney at White & Case LLP, Dewey LeBoeuf LLP, and Thelen LLP, three of the most prominent law firms in the United States where he advised thousands of entrepreneurs and business owners on a wide range of corporate and tax issues involving limited liability companies for the past seven years. Adam is recognized as a leading partnership tax expert and has lectured attorneys on the taxation of LLCs.

Win an LLC formation, an LLC Operating Agreement and $500 for your business!

In celebration of Women's Small Business Month, The Mom Entrepreneur has partnered with myLLCagreement.com to sponsor an exciting new Contest.

Here are the details...

MyLLCagreement.com is giving away the formation of a Limited Liability Company in any U.S. state. In addition, they will create an LLC Operating Agreement and pay your state fee. The winner will also receive a check for $500 from myLLCagreement.com to help with business expenses. The winner will also be featured on The Mom Entrepreneur’s Blog and on myLLCagreement.com’s website.

How to enter...

1. SUBSCRIBE. You MUST be a subscriber of The Mom Entrepreneur blog. Our awesome giveaways are for subscribers only. If you are not yet a subscriber, you can do so via email or in a reader.
2. VISIT. You must visit myLLcagreement.com and register for free on their site. Just click "try for free" and enter your contact information, including the special code "MOM SUCCESS". Then you may choose to answer the questions or come back at a later date to complete.
3. WAIT. Now you need to wait patiently until 5pm EST on November 2, 2009 to see if you are chosen at random as the winner. Winners will be contacted via email and announced on The Mom Entrepreneur blog.

GOOD LUCK!

How do I form an LLC?

In celebration of Women’s Small Business Month, we are continuing our series on Limited Liability Companies (LLCs) and how to protect yourself in business. If you missed part 1, click here…>

I chose to form an LLC in order to have better protection. As a business owner, you hope you never need to worry about being sued, but it is smart to have as much legal protection as possible. I had a client threaten to sue me for non performance; instead I sued him for not paying. We eventually settled, but I felt a lot better knowing I had additional protection on my assets.

Adam Bergman, Esq., president of myLLCagreement.com continues to answer our questions this week about how to form an LLC.

TME: How does a business owner go about forming an LLC?
Adam: An LLC is a separate legal entity that is formed under the authority of a state statute. All fifty states and the District of Columbia have enacted limited liability company statutes. An LLC is formed under, exists, and is governed by a state statute. In general, the state statute provides how an LLC in that state is formed, registered, and terminated. The statutes also generally provide that either the LLC adopt Article of Organization, an Operating Agreement, or use the default provisions of the statute to determine the other matters which impact the operation of the LLC.

In most cases, forming a LLC is as simple as filing a 1 page form often called the Articles of Organization. This generally consists of a number of straightforward questions such as the name of your entity, address, and the LLC’s purpose along with the state filing fee. You may form your own LLC for free; since all the forms and information necessary is located on each Secretary of State’s website, or you can hire an attorney or formation company to form it for you for a fee.

TME: What is an LLC Operating Agreement?
Adam: It is extremely important that every LLC have an LLC Operating Agreement. The LLC Operating Agreement is the core document that is referred to when issues concerning the LLC need to be resolved. The LLC Operating Agreement is the most important document for your LLC. It reflects the agreement among the members with respect to the affairs and management of the LLC as well as governs the relationship amongst the members of the LLC. By having an LLC Operating Agreement, the members will be provided with a clear set of rules that all members have agreed upon greatly reducing the likelihood of disagreement between them in the future. A LLC Operating Agreement will also greatly reduce financial and management misunderstandings, and make sure your business is governed by your own rules -- not default rules created by your state.

Thanks Adam! Join us next Monday for part 3 – Why does every LLC need to have an operating agreement?

In addition, we are offering a free teleseminar entitled: Protecting Yourself in Business - Why Every LLC Needs an Operating Agreement on Thursday, October 22nd from 1:00 pm - 2:00 pm EST. To register, click here...>

About Adam Bergman:
Adam Bergman is the president and creator of MyLLCAgreement.com, the leading online provider of customized LLC Operating Agreements. Mr. Bergman has worked as a corporate and tax attorney at White & Case LLP, Dewey LeBoeuf LLP, and Thelen LLP, three of the most prominent law firms in the United States where he advised thousands of entrepreneurs and business owners on a wide range of corporate and tax issues involving limited liability companies for the past seven years. Adam Bergman is recognized as a leading partnership tax expert and has lectured attorneys on the taxation of LLCs.

The facts about forming a Limited Liability Company - 1 of a 3 part series

Recently, members of The Mom Entrepreneur Online Support Group were discussing forming a Limited Liability Company or LLC. The women in our group wanted to know why they should form an LLC, and can it be done at an affordable price?

Members all agreed the process was easy, yet most hired a lawyer to file theirs or completed it themselves.

I hired a lawyer to form both of mine because I was not aware of any other methods for doing so. I had first operated the business as a sole proprietor, but as the company grew, I felt I needed better protection and decided an LLC was the way to go.

I recently discovered an online alternative. MyLLCagreement.com was created by corporate and tax attorneys from some of the largest law firms in the country; lawyers who were tired of seeing entrepreneurs and business owners spend thousands of dollars on legal fees or use outdated Internet forms for an LLC Operating Agreement.

Since this was a hot topic for discussion in our Online Support Group, I contacted Adam Bergman, president of myLLCagreement.com to provide readers with some insight as to why, when and how you would form an LLC.

This post is part 1 in a series of 3.

TME: What exactly is a Limited Liability Company (LLC)?
Adam: Limited liability companies (“LLCs”) are a creation of state law. An LLC is somewhat of a hybrid entity in that it can be structured to resemble a corporation for owner liability purposes and a partnership for federal income tax purposes. An LLC offers the limited liability benefit of a corporation and the single level of taxation of a partnership. The owners, not the entity, are then responsible for the payment of the tax, if any.

TME: How are LLCs structured?
Adam: LLCs are owned by investors known as members. The company is typically managed by a designated member or group of members. Like shareholders of a corporation, the members' liability is limited to the amount of their investment. For tax purposes, LLCs with more than one owner are treated as partnerships, and LLCs with one owner are disregarded. In both cases, the LLC income is taxed to the owner directly without any entity level tax.

TME: Why should a business owner set up an LLC entity?
Adam: The LLC has become the entity of choice for entrepreneurs and a significant majority of all new businesses primarily due to the following:

• LLCs are easy and inexpensive to form
• LLCs are recognized by all states
• LLCs offer limited liability for all members.
• LLCs offer one level of tax for federal income tax and state income tax purposes (in most cases).
• LLCs provide pass through of business losses to the member or members.
• LLCs can utilize a corporate management structure.
• LLCs can have one member or multiple members.
• LLCs offer flexibility in distributing cash to the members
• LLCs offer flexibility in allocating profits/losses to the members
• LLCs offer flexibility in conducting business affairs.
• LLCs can exist indefinitely.

TME: Why an LLC as opposed to a corporation or staying a sole proprietor?
Adam: Under current law, unless an entrepreneur expects to go public in the near future or will be engaging in a complex cross border transaction, there is very little reason for an entrepreneur to choose to operate his or her business in any other entity form other than an LLC (i.e. “C” corporation or “S” corporation). Most of the non-tax advantages of operating in corporate form are now available in all states in the form of the LLC, and the double tax creates a clear tax bias against the corporate form.

An LLC offers all of its members’ limited liability without restrictions on their participation in the venture. Furthermore, ownership interests in the LLC can be freely transferable if its members so choose. For these reasons, it is significantly more common for entrepreneurs and new business owners to select the LLC entity form when starting a new business and not a “C” corporation or “S” corporation.

Thanks Adam! Join us next Monday for part 2 – How to form an LLC.

In celebration of Women’s Small Business Month, we are also hosting a contest for an LLC formation, LLC Operating Agreement and $500 for your business all offered by myLLCagreement.com for one lucky mom entrepreneur winner.

In addition, on October 22nd at 1:00pm ET, Adam will be offering a complimentary teleseminar entitled: Protecting Yourself in Business - Why Every LLC Needs an Operating Agreement.

More details about our contest and teleseminar will follow throughout the month.

About Adam Bergman:
Adam is the president and creator of myLLCagreement.com, the leading online provider of customized LLC Operating Agreements. He has worked as a corporate and tax attorney at White & Case LLP, Dewey LeBoeuf LLP, and Thelen LLP, three of the most prominent law firms in the United States where he advised thousands of entrepreneurs and business owners on a wide range of corporate and tax issues involving limited liability companies for the past seven years. Adam is recognized as a leading partnership tax expert and has lectured attorneys on the taxation of LLCs.

MyLLCagreement.com was created in order to offer a cost effective alternative to spending thousands of dollars to form an LLC. In a few minutes online, entrepreneurs can receive a law firm quality LLC operating agreement they can trust without the law firm price.