Getting to know your state requirements

Each state requires different information to be listed on public record. For the most part, the initial report lists information such as:

• The names and addresses of your managers
• The name of your registered agent and your registered office address
• Often, if the LLC is not manager-managed, the members who own the LLC

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 is required to be filed annually or biannually (with updated information, of course). In those instances, this report is often referred to as 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), a manager or member of the LLC needs to sign the initial report.

Keeping your company current

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 in a timely manner, 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Often in these cases, the state doesn’t even tell you that your status has been revoked; you may not find out until you’ve been sued and realize that you don’t have the LLC protection you thought you had.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 the other ways in which your LLC can dissolve (or reorganize) in Chapter 16.

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’re required to 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 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.

Acquiring state, city, and possibly county business licenses

Most states require that all businesses apply for a standard business license. This is the “letter of approval,” so to speak, that you need to legally conduct business within the state. The state tax board uses the licenses to keep track of all enterprises that are 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:

• Business name, physical location, and mailing address
• Type of business and formation date
• Prospective business activities and expected income
• Federal tax identification number (see Chapter 8)
• Names and addresses of managers/members and possibly percentages of ownership

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 the ownership of your business changes, most states require that the new owners apply for a new business license under their names, even if the business name stays the same. Moving your business to a new address may also require a new business license application, especially if you are moving to a new city or county. Essentially, you just refile the form with the updated information. If a change doesn’t significantly alter the structure of the business (such as adding or dropping a member who owns only a small percentage of the LLC), you normally don’t have to file a new application. However, some states require you to submit a letter to the business license department describing the change. The department then uses the information to update your business license.

Applying for a sales and use tax permit

If you’re selling tangible goods, then you’re required to 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.

To collect sales tax on the products you sell to your customers, you need a sales and use tax permit. What’s the difference between sales tax and use tax? I’ll explain:

• Sales tax is imposed on all retailers (anyone who sells tangible goods — not services — in the state). Retailers are required to pay and report sales taxes to the state board of equalization, and they have the option to collect sales tax reimbursement from their customers at the time of the sale.
• Use tax is imposed on you when you purchase something from an out-of-state vendor and use, consume, or store the item in your state. Use tax also applies if you lease an item. And you thought you were avoiding tax when you bought that fancy TV off eBay!

You are typically 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, then you’re required to 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, in other states, you are still required to go through the application process. 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. Not only will the auditor pull every single penny of unpaid taxes out of the woodwork, but the state will impose hefty fines on top of it all. Needless to say, not fun.

Most states call the department that collects the state taxes the board of equalization. (I have no idea what that means or why they decided to use such a dumb name — I suspect they decided that “board of tax collectors” didn’t sound so friendly.) A lot of businesses pay this department a hefty chunk of dough every quarter.

Following special licensing requirements

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’re probably going to be required to obtain special licensing. If you own your own building, you have to comply with building codes and obtain special permits. 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 at all, you should read this section. I’m sure you’ll find one thing or another that applies to you!

In this section, I go over some common special licenses that you may have to obtain. All states are different, though, and I can’t possibly list every single license requirement in every single state. To make sure that you have everything covered, give your state’s licensing bureau a call before starting business operations.

In most states, because you file so many documents with so many different state and local agencies, you are assigned a nine-digit UBI (Universal Business Identifier) number upon filing your state business license. You use this number on all your state and local filings so that state and local agencies can easily identify you. A UBI number is sometimes called a tax registration number, business registration number, or business license number.

Federal tax identification number

In Chapter 8, I go into detail on 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.

If you’re reading this sentence sans tax ID number, then you’re asking for trouble! Not with me, but with everyone else you intend to do business with. As a matter of fact, I don’t think you can even make any of the filings I address in this chapter without having that annoying number. You can’t apply for business or professional licenses, hire employees, or even open a bank account without one. I’d be surprised if you don’t know your company’s tax ID number by heart by the time you finish this book.

Workers’ compensation insurance

All businesses that have employees are required to carry workers’ compensation insurance to protect employees in the event that 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 but is required by law for each employee who works for you.

If you have a payroll company, you should also ask them about unemployment insurance. They may be able to get you a good deal and also tie it directly to your payroll. That way you won’t have to update them whenever you lose or bring on employees!

Documenting your decisions with resolutions

Luckily, the government is pretty lax when it comes to LLCs (as opposed to corporations); therefore, strict and formal meetings of the members and/or managers of the company aren’t required. What is pertinent, however, is that you document each important decision made by the members and/or managers. The documenting 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:

• Allowing the treasurer to open and use LLC bank accounts along with a designation of authorized signers
• Adopting a fictitious firm name (a DBA, for “doing business as”)
• Approving a contract
• Leasing of property by the LLC
• Acquiring an independent audit of the LLC’s tax and financial records
• Changing the LLC’s fiscal tax year
• Approving salaries and bonuses of key employees

Creating a company kit

All limited liability companies need to have a company kit. Your company kit keeps all your important documents organized for you 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. Not only does this kit protect against loss and misunderstandings, but it allows all parties to have continuous access to important corporate documents … not just the person who is in possession of the physical kit.

When you form an LLC with a formation company, you may be enticed to pay extra for a physical company kit. If you go this route rather than the digital route, beware of the fill-in-the-blank forms that come with it. Because LLCs are so customizable, a one-size-fits-all approach doesn’t work. Besides, most of these forms aren’t even tailored to your state’s specific laws governing LLCs.

When you receive your kit, collect the following documents to upload to it (or place in it):

• Your state-filed articles of organization and company charter
• Your operating agreement (if you already have it)
• Any company meeting minutes and resolutions
• A list of your members, their contact information, and their membership percentages
• Any cancelled membership certificates
• Your federal tax ID number and filing
• Your business licenses and state filings
• Any foreign filings that you have made in other states
• Your company’s registered agent information for each state

If your attorney is forming your entity, he may provide you with a physical company kit, where you keep all of your important company records. But beware — many attorneys insist on keeping your corporate kit at their offices. This isn’t because they want to save you real estate on your bookshelf. It’s because they know that if you want to make any changes or obtain your records to defend a lawsuit, you’ll have to contact them first … and very likely end up paying for their services each time.

Creating and maintaining a membership roll

Creating a membership roll is very simple. You just go online and enter in each member’s name, address, and the amount of membership interest she has. If you have a physical company kit, you should have gotten a blank form to use 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.

Tracking tax filings and financial information

Your tax returns and financial reports show the backbone of your business. These records undeniably prove that your LLC is an operational business. Because they are backed up by bank statements and receipts, the courts take them very seriously as 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 than 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 9 through 12) should designate what sorts of financial reports the members have access to and how they can go about viewing the records. Tax returns, balance sheets, and profit-and-loss statements should be kept at your corporate office in case 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.