Monday, July 30, 2007

Starting a Limited Liability Company

When starting a Limited Liability Company (LLC), you need three things:

1. An operating agreement.
2. Articles of Organization.
3. An EIN number.

You can do this for yourself and hope for the best, or you can consult an attorney. Of course, I suggest consulting an attorney.

Of the three things listed above, I must admit that preparing the Articles and getting an EIN number are things that can be done without a lawyer. The Articles of can be found on the Indiana Secretary of State's site via this link (it is in PDF format). An EIN number can be gotten from the Internal Revenue Service through this link. That said, get an attorney to make sure you got the job done right before filing the documents with the Indiana Secretary of State and the Internal Revenue Service, respectively.

Where I think a potential LLC needs an attorney is in selecting the business entity and in drafting the operating agreement. The Indiana law setting out the statutory requirements for a LLC can be found here. Yes, one can download LLC operating agreements from the Net or buy them at Office Depot (or some other office supply store) but who is going to make sure that these forms do two important things: 1) comply with Indiana law; and 2) meet the needs of the business? About the first one, read through the Indiana LLC statute (see the link above) while reading the form obtained from the Net or the store and make sure it does match Indiana law. I suggest that is not a wise use of a businessperson's time.

As for number two, let me tell a story. Two fellows go into business and then the business sours. The LLC operating agreement came off the Internet, and then the thing was signed without any changes other than adding their names. The operating agreement does not address certain matters. The parties cannot agree on settling these matters and litigation looms. Without reaching a courtroom, the parties have incurred legal bills going into the four figures and rising. The lawyers agree on one thing: a "real" operating agreement would have cost a whole lot less and solved the problem without any litigation. I suspect any claim of no litigation but having seen the operating agreement, it certainly would made a very short case. In the end, call it another penny-wise, pound-foolish example.