Chapter 12
IN THIS CHAPTER
Filing your initial report
Acquiring the necessary business licenses
Keeping your company’s records properly
I’m sure you’re hankering to jump right into building your business, but not so fast! You didn’t think you could simply file some articles of organization and the government would let you go scot-free, did you? Nope. You still need to take care of removing some red tape.
Although the amount of red tape varies depending on your industry, with a little planning, it usually isn’t too much of a hassle. First and foremost, most states require you to file an annual report with your local secretary of state or franchise tax board. Your state may refer to this report by a different name, and the requirements may also differ substantially. In this chapter, I’ll first show you how to file your report. Then, I’ll discuss the business licenses you must obtain and the regular recordkeeping you must do to protect your business’s limited liability. With these details arranged, your LLC will be legit and protected, and you’ll be free to begin transacting business.
When creating your LLC, you create and file your articles of organization (as discussed in Chapter 5) and are well on your way to completing a customized operating agreement for your business (see Part 3). At this point, you should have made certain decisions about how the company will be managed and who the managers are, among other things. Well, if you remember correctly, one of the major benefits of an LLC is privacy. A lot of the decisions you make regarding your company remain in your operating agreement, which isn’t public record. In a perfect world, you could leave it at that. In this world, however, a few of your decisions must be revealed to the government and, subsequently, to the public eye.
The amount of disclosure required varies substantially from state to state. As I discuss in Chapter 4, these disclosure requirements can be a big incentive (or disincentive) to form your LLC in a particular state. The first and most important document you may be forced to disclose is your company’s initial report, which is usually filed within the first couple of months of forming your company and, in most states, reveals the managers and/or members of your LLC.
Each state requires different information to be listed on the public record. For the most part, the initial report lists information such as:
The name and the filing processes also vary substantially from state to state. Some states refer to this initial report as an initial list of managers or members or an information statement. In some states, this same report must be filed annually or biannually (with updated information, of course). In those instances, this report is often called an annual report.
The fee for the initial report can be hefty — sometimes as much as the fee for filing the articles of organization — and depending on the state, can be due either annually or biannually. Also, unlike the articles of organization, which can be submitted by a separate organizer (a person who files your articles but otherwise has nothing to do with your company), an LLC manager or member must sign the initial report. Luckily, most states now allow this to be all done online.
Although this may seem like a trivial detail, if you don’t file your initial report (or, subsequently, your annual reports) and pay your state taxes on time, you’ll not only face some pretty hefty penalties and fees, but your LLC may go into a default or revoked status relatively quickly. After all, when it comes to the life of your LLC, the state giveth, and the state sure can taketh away!
Often in these cases, the state doesn’t even tell you that your status has been revoked; you may not find out until you’ve been sued and realize that you don’t have the LLC protection you thought you had. When your LLC is in revoked status, it’s considered an administrative dissolution, and you may very well lose all liability protection, which was a key component of why you created an LLC in the first place. Find out more about administrative dissolution and how your LLC can dissolve (or reorganize) in Chapter 15.
Luckily, you’re usually not required to go to the expense of filing an updated report every time your information changes. In most states, you must file the report only on its due date (typically on the anniversary of the LLC’s filing date). Not only does this save you fees, but — in case you haven’t caught on already — it may also be a good way to get yourself and your LLC a little bit of privacy: If you have to list the names of the members of the LLC only when you file the report, you have an entire 11 to 23 months (depending on how often an updated report is due) to allow whoever you darn well please to own or manage the company.
After you file your initial report with the secretary of state, you’ll likely need to get a business license (or two or three!). Unless you’re in the business of mass weaponry, drug development, or peddling junk bonds, the federal government usually keeps its distance and leaves business licensing to state and local governments. It’s sort of like “pay to play,” and the last thing you should ever do is open up shop without first forking over some cash for official government approval. Avoiding this step is the fastest way to get shut down. (Yes, the United States does have a free market, but you didn’t think that means it’s actually free, did you?)
If your LLC operates a business that engages with the public, most states will require it to apply for a standard business license. This is the “letter of approval,” so to speak, that you need to conduct business legally within the state. The state tax board — usually called the “department of taxation” or something similar — uses the licenses to track all enterprises responsible for paying state and sales or use taxes.
In addition to the state license, you may be required to file for a city and/or county license, depending on where you live. If your business is located within city limits, you need to obtain a license from the city; if it falls outside city limits, you must obtain your license from the county. Contact your county clerk’s office or the city’s business license department and ask which local licenses and permits you need to obtain. Keep in mind that you’ll likely be required to pay an annual fee and/or local taxes for each license.
Each state requires different details from businesses applying for licenses. Typically, you can expect a business license application to request the following information:
To find out where to obtain a business license application and where your application must be filed, check the secretary of state’s website for the state in which you filed.
If you’re selling tangible goods, you must collect sales tax from your customers and pay the government. What is a tangible good? Although the definition may vary slightly between states, you can pretty much classify a tangible good as being any item that can be seen, weighed, measured, felt, or touched or is in any other manner perceptible to the senses. Real estate is excluded.
You need a sales and use tax permit to collect sales tax on the products you sell to your customers. What’s the difference between sales tax and use tax? I’ll explain:
Typically, you are imposed a statewide sales tax and a local sales tax that differs from city to city. If your business isn’t located in an incorporated city, you must pay the county at its local sales tax rate. By combining state and local tax rates, you come up with the amount of sales tax to charge your customers.
What if you aren’t selling tangible goods? What if you run a dry-cleaning service or a dog-grooming facility? Aren’t you in the clear? Well, in some states, you are. Unfortunately, you must still go through the application process in other states. State governments prefer that individuals aren’t the ones deciding whether they are liable for paying sales and use taxes. The government prefers that a seasoned tax collector make that determination.
Although it may seem like a hassle, you want to go through this application process. The alternative is the harrowing experience of having a state tax auditor set up shop in your office for two (or more!) weeks and proceed to pore over each and every income and expenditure record, tallying up use tax on sticky notes you bought online and sales tax on small thank-you items you shipped to your clients. The auditor will pull every penny of unpaid taxes out of the woodwork, and the state will impose hefty fines on top of it all. Needless to say, it’s not fun.
If you are one of the lucky ones who decide to set up shop in a heavily regulated industry, such as healthcare, gambling, auto repair, or liquor, then you’ll probably be required to obtain special licensing. You must comply with building codes and obtain special permits if you own your own building. If you deal with any sort of food product, then health-code regulations come into play. Now that I think about it, if you’re in business, you should read this section. I’m sure you’ll find one thing or another that applies to you!
In this section, I review some common special licenses you may have to obtain. All states are different, though, and I can’t possibly list every single license requirement in every single state. Call your state’s licensing bureau before starting business operations to ensure you have everything covered.
In addition to the basic licenses required for most businesses, you may be required to file for other licenses, depending on your state. Here are a few that you may be required to apply for:
The state doesn’t regulate some licenses; instead, they are issued by your city or county government. Here are a few licenses to be on the lookout for:
A federal license in your area of expertise may be required if you are in a heavily regulated industry. This license lets the public know that you know your stuff and that you’re also a reputable company operating under the government’s watchful eye. Here are some industries that are required to operate under special federal-issued licenses:
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). If you are only selling securities (membership shares in exchange for capital investment) and are looking for a small number of investors, you may be exempt. See Chapter 10 for more information on registration exemptions.www.dot.gov
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).You thought you were finished? You’re dealing with the government here, remember? Between the federal, state, city, and county requirements, the paperwork is never-ending. Regardless, all businesses must handle two more things. The first is your federal tax identification number — you won’t get far without it! The second is workers’ compensation insurance — don’t even think about hiring employees until this is taken care of.
In Chapter 7, I detail how to obtain your LLC’s tax identification number (tax ID for short; also called an employer identification number or EIN). If you haven’t done so yet, flip back to that section and do it now.
All businesses that have employees must carry workers’ compensation insurance to protect employees if they get injured on the job and can’t work or have medical expenses that need to be paid. This insurance is provided by private insurance companies and is required by law for each employee who works for you.
As you may have read in Chapter 2, limited liability companies offer two forms of liability protection:
This second form of liability protection is mostly unique to LLCs and is commonly called charging order protection.
The best way to understand basic liability is to think of it as a piece of fabric — a veil — that protects you and your personal assets from your business’s litigious predators. The term corporate veil specifically refers to the protection the LLC provides to your personal assets if a lawsuit is filed against the business.
When a creditor of the LLC breaches this veil of protection and seizes your personal assets, it is called piercing the veil. In short, the limited liability, perhaps the most important attribute of an LLC, has been lost.
To pierce your veil, the creditor has to add you, as an individual, to the lawsuit against your company. In the complaint, the creditor will seek to impose personal liability on you, the owner, for the business’s debts or wrongdoing (in other words, the creditor pleads the court to pierce the veil of limited liability). Then the creditor has to prove to the court that the veil of limited liability should be pierced. If the creditor proves the veil should be pierced, the court will make you personally responsible for the judgment, meaning the creditor can seize and liquidate your personal assets to settle the claim.
In Chapter 19, I list ten important steps you must take to keep your liability intact.
Here, I address the most important one: recordkeeping. In this context, recordkeeping entails the following:
Luckily, the government is pretty lax when it comes to LLCs (as opposed to corporations); therefore, strict and formal meetings of the company’s members and/or managers aren’t required. What is pertinent, however, is that you document each important decision made by the members and/or managers. The documentation is often done in the form of a resolution.
When you create your operating agreement, you specify what percentage of approval is required to make major company decisions, as well as what constitutes a major decision in the first place — it could range from things like taking on a new building lease to taking on an investor. If you and your partners specify in the operating agreement that a simple majority of membership interests is all that’s needed to approve a decision, and you are a majority stakeholder, then you are the only member who needs to agree to and sign the resolution.
Because drafting a resolution is such an easy process, you should use this method to document as many company decisions as possible. Common decisions you may want to make by way of a resolution include
All limited liability companies need to have a company kit. Your company kit keeps all your important documents organized and covers your butt if you ever end up in court.
In the old days, the standard for a company kit was a single leather-bound binder. However, technology has taken over, and more and more people are opting for a digital company kit. At CorpAssure, we no longer offer a physical company kit, favoring our digital dashboard instead. Regardless of how you maintain it, this “kit” is essential: It protects against loss and misunderstandings and allows all parties to have continuous access to important corporate documents. If you keep your kit in physical paper form, ensure it is stored in a secure place where all members can easily access it.
When you receive your kit, collect the following documents to upload to it (or place in it):
Creating a membership roll is very simple. You just go online and enter each member’s name, address, and the amount of membership interest they have. If you have a physical company kit, you should have gotten a blank form for this purpose. Make sure to update this information every time your LLC’s membership changes. Some states even require that you supply your registered agent with an updated copy of your membership roll. Most online company kit solutions offer this functionality.
Your tax returns and financial reports show the backbone of your business. These records undeniably prove that your LLC is an operational business. Because bank statements and receipts back them up, the courts take them very seriously as a testimony to the intricacies of your business.
You need to hang on to your pertinent tax records and financial statements for seven years. These tax records show the courts that your company is, financially, a separate entity from the owners — in other words, you and your LLC don’t share a bank account. Your financial information proves that you have been actively engaging in business and not using the entity as an extension of yourself (also called an alter ego).
Your operating agreement (see Chapters 8–11) should designate the sorts of financial reports the members can access and how they can view the records. Tax returns, balance sheets, and profit-and-loss statements should be kept at your corporate office if one of the partners wants to view this information. Also, in the event of a lawsuit, you will likely be required to hand over copies of this information to the plaintiff.