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texperience
01-04-2010, 02:52 PM
Hello all!

A friend of mine and myself are looking to start up an LLC. We understand that the LLC formation requirements of Iowa are as follows:

- File articles of organization with the Secretary of State.
- Pay related fee. ($50)

We also have a custom-made operating agreement that we have typed up to answer much of questions to be answered for the members/owners of the company (just my friend and myself currently).

My questions are, first, I've heard of many people starting their own LLCs by doing all of the paperwork themselves. This means articles of organization, paying the filing fee, creating an operating agreement, etc. For those of you that have done this, how hard was it? Did you seek legal and/or financial advice through your DIY process?

Reason being, I consulted with two law firms today. The first offered a flat rate fee of $650 to $750 to have the articles of organization filed, to have the operating agreement created, and to have the lawyer listed as a registered agent. The second firm said it would be hourly rate, of which could total to about $1,000 or more. I found both of these fees to be pretty steep for just creating an LLC (not an S or C corporation).

My second question is, for our operating agreement, should we stick to using our custom-made version, which covers many many topics, without consulting legal assistance in forming an agreement? I just want to know for those whom started their LLCs on their own, did you create your operating agreement yourself and stick with it, change it as the future unfolded, etc., or did you have a lawyer do it for a fee?

As a starting company in these times, I wish to be as economical as possible, while performing correct procedures.

Thank you for your advice in advance!

huggytree
01-04-2010, 04:58 PM
Here in WI you can do it over the state gov. website...it cost like $99 and took 20 minutes....see if your state also has this option..

i dont think $650 sounds too bad...because its a partnership make sure you have lawyers draw things up incase it goes bad (and it usually does)

Business Attorney
01-04-2010, 10:36 PM
The procedures for forming an LLC in most states are pretty simple. Often the articles of organization (or the equivalent) can be done online on the Secretary of State's website in a matter of minutes.

The legal issues are another matter. First, in many states you select to be either a manager-managed LLC or a member-managed LLC. There can be significant consequences to the choice. In some states, you need to specify that choice in the articles of organization, and you should understand the pros and cons of either type.

Second, and most important, as huggytree points out, the operating agreement is a very important document, particularly when you have more than one member. The operating agreement should cover such matters as how management decisions are made (especially if the two of you don't agree), distributions of cash, allocations of taxable income, restrictions on transfer of the membership interests, rights to indemnification and many more. Unless you have spent a lot of time learning about operating agreements and fully understand the legal and business ramifications of the choices you make, you can be in big trouble if you draft your own.

When members cannot resolve conflicts themselves, the legal costs skyrocket quickly. I have never seen a serious dispute among members that couldn't have been addressed for a fraction of the cost if the members had just spent more time and care drafting a thoughtful and well-worded operating agreement. Like the old commercial of the auto mechanic selling oil filters, "You can pay me now or pay me later."

Of course, at either price you to make sure that you are getting an operating agreement that reflects your specific facts and needs. If either lawyer is going to give you a "canned" agreement without extensive discussions with you, you may be better off with your home-grown version. At least your operating agreement, even if incomplete and insufficient in some respects, is based on your discussions with your other member.

phanio
01-05-2010, 03:46 PM
As stated, most states have their own forms that you can download, fill out and mail in. This can be done quickly. You really don't need an operating agreement but it is advisable to have one. Keep this in mind - in your agreement - you will state how changes to that document can be made. Thus, as you move forward, you and your partner can easily make changes.

I think the most important thing in the agreement is what you intend - not all the legalease. Just clearly spell out what you intend and you should be fine.

$50 bucks is cheap - in Texas it is $300.

Evan
01-06-2010, 11:24 PM
You really don't need an operating agreement but it is advisable to have one.

Every LLC, single-member LLCs too, should have an operating agreement.

MikeNetFX
01-09-2010, 09:45 AM
So is the operating agreement just something you write up yourself and use, or is it something that must be registered with the government officially?

Business Attorney
01-09-2010, 02:50 PM
The operating agreement is not filed with the government. It is a private agreement which controls the internal operations of the LLC.

The Entrepreneurs Network
01-09-2010, 05:19 PM
I agree with Business Attorney. You don't need an agreement when things go well and there are no issues between the partners. The completeness and quality of the operating agreement becomes important when the partnership runs into problems.

Although I am not a great fan of spending money on lawyers (sorry Business Attorney :)), the operating agreement is a document that I would have reviewed by a lawyer. If you want to safe money, get a "boiler plate" agreement and modify it to suit your needs and then let a lawyer review it. That way you might be able to save a few $$

Have you given consideration to setting up a C or S Corp? The requirement for a good operating agreement has always held me back from doing an LLC. I formed a C Corp last year with 3 other partners when we acquired a franchise. I like it because it is easy and not much more work to maintain and gives you a lot of flexibility in the future.

Business Attorney
01-11-2010, 12:27 AM
Although I am not a great fan of spending money on lawyers (sorry Business Attorney :)), the operating agreement is a document that I would have reviewed by a lawyer. If you want to safe money, get a "boiler plate" agreement and modify it to suit your needs and then let a lawyer review it. That way you might be able to save a few $$

I'm not a fan of people spending money on attorneys when they don't need to. Businesses have to decide how to allocate their resources and should be careful. Legal fees are no exception.

As for saving money by modifying your own agreement and asking an attorney to review it, I think that will often backfire. Most attorneys who regularly form LLCs are very familiar with their own operating agreements that they use as templates and can quickly and efficiently make changes. Giving them an unfamiliar agreement to review means that they must check it very carefully to make sure that it has all the key provisions that they already know exist in their own documents.

A small business owner would be better off reading through one or two good operating agreements, getting a good checklist and discussing with the other members (in advance of meeting with the attorney) things like how management decisions are made, how distributions are determined, how income and losses are allocated for tax purposes, and what the members want to happen if one of them dies, becomes disabled, or simply wants to leave the business. What happens if the owners are in a deadlock? What happens if one owner steals from the business or does something not necessarily illegal that injures the reputation of the business? What happens if one partner simply turns out to be lazy?

Having a basic understanding of what goes into an operating agreement and at least some general discussion among the members on key issues can shave a lot of time off your legal bill. Believe me, while I certainly don't object to spending an hour teaching a new client about the basics of LLCs and operating agreements, it is much more efficient (and refreshing) when we can cut through all that and jump into a discussion of the real business issues.


Have you given consideration to setting up a C or S Corp? The requirement for a good operating agreement has always held me back from doing an LLC. I formed a C Corp last year with 3 other partners when we acquired a franchise. I like it because it is easy and not much more work to maintain and gives you a lot of flexibility in the future.

You have a false sense of security, I am afraid. While the state laws on corporations provide a more fixed framework than state LLC laws (which typically leave a great deal of issues open to the members), most corporations with more than one shareholder should have a shareholders' agreement. The corporate structure eliminates or reduces the need to address issues like cash distributions and tax allocations, but issues like what to do in the event of death, disability or disagreements among the shareholders loom just as large in a C corporation as in an LLC.

Furthermore, while a C corporation does have considerable flexibility, you have a management structure that is dictated by statute (shareholders > directors > officers) and an equity structure (common and preferred) that typically requires uniform distributions within a class. If your needs dictate a different structure, a good lawyer can draft something that will generally overcome those structural limitations, but a corporation is inherently less flexible that an LLC. In an LLC, molding the structure to your specific needs is a basic feature.

An S corporation presents a level of inflexibility that even the best business attorney cannot draft around. Limitations of a single class of stock and limitations on who can own shares are set in stone. Break those rules, and you lose your S election. An S corporation is probably the least flexible form of business that you can imagine.

That doesn't mean that there is anything wrong with a C corporation or an S corporation in appropriate circumstance. I have a small side business that I created as a C corporation. But the reason was that I have no need for flexibility (I am the sole shareholder and always expect to be) and I understand the double taxation issues that I am getting with a C corporation. On the other hand, I meet businesses who can't believe that when their C corporation sells its assets for millions of dollars that the corporation is going to have to pay taxes at regular corporate rates on the entire gain and that they are going to have to pay capital gains tax on those same monies when the corporation distributes the after-tax amounts to the shareholders.

The key is understanding what flexibility does and does not exist and making sure to match the appropriate form of entity to your specific needs.

The Entrepreneurs Network
01-11-2010, 12:26 PM
Many good points in Business Attorney’s posts and I can't argue with them. He mentioned that the C Corp does have considerable flexibility and in the last incorporation case for one of my businesses we needed the flexibility for 2 of the 4 shareholders (that held 50+%) to transfer their interest in the first year. That would have created problems if we chose an LLC. The ability to issue different classes of shares in a C Corp has advantages as well, particularly if the business wants to raise more capital in the future.

My feeling is that many business owners too quickly jump to the LLC solution because they are scared off by the structure and reporting requirements of a corporation. I don't think that fear is justified. Anyone that is smart enough to run their own business can deal with the reporting issues of a corporation and it should not be the reason to go the LLC route. Many more considerations come into play, as in my last incorporation case with the option to transfer of 50% of the shares.



A small business owner should familiarize him/herself with the pros and cons of all types of entities and how they fit with their requirements before making a decision.

Business Attorney
01-11-2010, 01:08 PM
My feeling is that many business owners too quickly jump to the LLC solution because they are scared off by the structure and reporting requirements of a corporation. I don't think that fear is justified. Anyone that is smart enough to run their own business can deal with the reporting issues of a corporation and it should not be the reason to go the LLC route. Many more considerations come into play, as in my last incorporation case with the option to transfer of 50% of the shares.



Harry, I agree with this 100%. Many commentators over-emphasize the corporate recordkeeping requirements as a factor in the decision. Having annual meetings of shareholders and directors is simply not that difficult. If a business owner doesn't think he will have the discipline to keep those minimal records himself, then he can have his attorney do it. It should certainly not be the primary reason someone chooses an LLC.


A small business owner should familiarize him/herself with the pros and cons of all types of entities and how they fit with their requirements before making a decision.

Again, I agree 100%. Choosing the right entity initially is very important. Changing the business to another type of entity later usually involves more legal fees, filing fees, accounting costs and often tax consequences.

Money And Mass
01-13-2010, 06:36 PM
Again, I agree 100%. Choosing the right entity initially is very important. Changing the business to another type of entity later usually involves more legal fees, filing fees, accounting costs and often tax consequences.

So if I'm a sole prop now and 6mo later I want to be a corp, what kind of negative consequences would I run into?

Also what's S corp and C corp?

Evan
01-13-2010, 07:02 PM
I agree with David regarding LLCs/C-Corps/S-Corps.

Corporations, C and S, both have purposes and it's knowing what they are best suited for. For example, I would never own a corporation and put real estate in it. I would also never incorporate any business that I know would probably generate substantial losses.

Blowing the S election is really not that difficult because people don't always like taking "net income" and dividing it by the # of shares each shareholder owns. People feel entitled to receive a higher distribution of some form, and doing that blows the election.

Other factors to consider are your own personal tax situation. For example, if you are in the highest personal tax bracket, a C-Corporation could mean your income is subjected to a LOWER tax rate than if it were an S-Corp (or LLC). Even if it's double taxed, that rate can still be lower than the effective tax rate. You may also have other considerations beyond legal OR tax ones. For example, if you have kids going to college soon and have an S-Corporation, your 1040 can show some high net income. If it were in a C-Corp, all of that income from the S-Corp wouldn't have flown through, and could actually be beneficial. Some students receive VERY little financial aid because their parents earn too much -- and these people are SWIMMING in debt after college. So doing a C-Corp could actually make sense for reasons beyond legal or tax purposes.

Evan
01-13-2010, 07:05 PM
So if I'm a sole prop now and 6mo later I want to be a corp, what kind of negative consequences would I run into?

Also what's S corp and C corp?

If you don't know the difference between an S-Corp and C-Corp, Google it. There are a million references, doesn't make sense to reinvent the wheel. Some sources are better than others.

A lot of "negative" consequences could result, it depends on your specific business.