Should your business be formed as an LLC?

Choosing a form of organization is very important for your business

Starting a new business is an exciting and sometimes frightening time. You have many things to deal with, from locating a site for your business to working with customers for the first time. Before any of that happens, you should complete some preliminary tasks that may be less exciting but equally important to the long-term success of your business.

What form will your business take?

Among the first tasks, you need to consider the legal structure your business will take. You can operate as a sole proprietorship, the simplest organization form. However, this form is limited to individuals and carries the potential for personal liability for the debts and obligations of the business.

You could also choose a partnership, a corporation, or a limited liability company (LLC). The LLC has become popular in Colorado and elsewhere due to its dual advantage of providing the protection from personal liability and the tax advantage of a partnership.

With an LLC, you can have a single-member LLC or a multi-member LLC. After filing the "Articles of Organization" with the Secretary of State's office, you should create the LLC's governing document, known as an operating agreement, which defines the relationship of the members. It will identify the profit- and loss-sharing allocation among the members. It will also describe the percentage ownership interests in the LLC and, importantly, the rights and responsibilities of the owners and management structure.

Formalities are important

Formalities, such as when meetings need to be held, how business decisions will be made, when members are paid profits or can take a draw, and the voting rights of the members may seem less important than signing your first lease agreement or meeting with suppliers, but this superstructure will ensure that proper expectations are set and that there are mechanisms in place to deal with crises when they develop.

When there are no profits or losses, much of this may seem abstract and unimportant. However, once there are profits, you want to minimize any disputes, misunderstandings, or hurt feelings among the members.

Even if you are forming a single-member LLC, an appropriate operating agreement is important. Because it is possible for a court to disregard an LLC form when allegations of abuse are raised during a dispute, failing to have a clear operating agreement and adhering to its formalities could result in your being held personally liable for the liabilities of the business.

By creating a detailed and methodical operating agreement, you can enhance the operations of your business and prevent disputes. It also ensures you will continue to receive the benefit of the LLC form.

Decisions regarding your choice of business form and the contents of your operating agreement are decisions you can make on your own. But with something this important, wouldn' t you rather know it was done properly the first time? With everything else that is going on during a start-up, working with the experienced business attorneys at Wick & Trautwein can help you with this process, allowing you to focus on making your plans a success.