I incorporated an LLC, is that enough?

OpenSo, you start a business, but you don’t incorporate.   Here, you are either a sole proprietorship (1 founder / partner / yourself), or you are a partnership (more than one person involved).   This is the most simplistic business structure, but there are serious drawbacks.  First, in either situation, you are personally liable for the debts of, and all liabilities of your business.  If you are in a partnership, you are also jointly and severally liable (meaning you personally can be held responsible for all of your business’s liabilities even if you have multiple partners) for all of your business’s liabilities.   Second, there are no real protections for you, and your business is governed by the general sole proprietorship laws or partnership laws of the state.

Many people will choose to protect themselves by creating some type of corporate form.  You really have two main options in Missouri, you can file an LLC, or you can become a corporation.   There are many reasons you would choose one or the other, but the LLC is a much more popular form because of three things.  First, it offers pass-thru taxation, meaning that you don’t face the corporate double tax (paying taxes on corporate income, and then paying personal income tax on your salary or other payments).   Second, there are far fewer state requirements to maintain with the LLC corporate form than a corporation (i.e. no required annual shareholder meetings, no need to have minute books, etc.).  Third, to file an LLC takes a very short amount of time, can be done online, and you can instantly be a corporation in just a few minutes (Incorporate in Missouri via the MO Secretary of State’s website – Note, you will have to create an account with the SOS).

So, you have a small business, and you believe an LLC is the best corporate form for my company – what’s next?   Well, to maintain your corporate protection, you have to follow the requirements for LLCs carved out in Missouri’s laws.  Without maintaining these requirements, the personal protections (i.e. the shield created by the separate incorporated entity) could be eliminated.   One such requirement is having an operating agreement drafted, and again, MO state law requires that all LLCs have an operating agreement.

The first question many will ask is, what if I don’t have one, will I get into trouble?   The simple answer is no, not necessarily – the operating agreement is an internal agreement that is never filed with the state or shared with anyone else.   So, the State doesn’t necessarily know you don’t have one.  However, the state requires them because they are essential to your company, and here is why:

  • If you have one or more partners, and you form an LLC this document will divvy up the profits, losses and voting interest.
  • Succession planning – this document will allow you to dictate who gets your shares (and your partner’s shares) upon your or their untimely death
  • Voting issues and control issues – the document will dictate what happens if your team suddenly gets into an impasse, or becomes hostile towards each other – this is important to have set up initially because a business relationship can sour – and can sour suddenly.
  • What happens in the event that one of the team members wants to leave the company?   Without this agreement in place, they continue to own their interest – and now you have to dilute your share to replace them!
  • You can also dictate who gets diluted and how if you need to bring on more people – and what their rights in the company will be
  • Lastly – even if you are a single member, and something happens – i.e. a customer sues you, or there is an issue where the state needs it – without an operating agreement in place, the shield that your LLC should protect you from could disappear.
Posted by: mprictor on June 15, 2015
Posted in: Law, Starting a Business