In my previous posts concerning my efforts at starting an IT business in my new home state of Arizona (Episode 0, part 1 and part 2), I had decided that a simple sole proprietorship was the way to go. However, I began to reconsider that course of action when I realized the liabilities involved in sole proprietorship (SP).
As a SP, all of my personal assets can be auctioned off to settle a debt. A Limited Liability Company (LLC) affords some protection to my personal assets. Furthermore, I began to have grand ideas of creating an actual business rather than simply acting as a hired gun. MSP, ISV, ASP, SaaS providor? It is all within the realm of possibilities… and it’s all suggesting an even greater need for some liability limitation. I figured it would be best to preempt the future and make an LLC now.
I found a law office in Arizona that has a ton of great information concerning the formation of LLCs in the state. While it’s specific to Arizona law, I believe that the information provided is still useful in general if you’re looking to form an LLC.
The basic information to take away is that LLCs are considered a “liability deflecting entity” that can and should be formed around any business venture. Some folks that own and rent property even create a separate LLC for each and every rental so the liabilities of one won’t threaten the others.
While LLCs can mitigate the risk of personal liability and increase the likelihood of creditors working out a deal with you, they are not bulletproof. If not formed correctly and with enough due diligence given to its continued operation, a court can “Pierce the Corporate Veil” and hold individuals accountable.
Depending on the state you live in, part of the due diligence of operating an LLC can include, but is not limited to (great, I’m sounding like a lawyer) not using corporate money to pay shareholder debts or expenses, not creating Articles of Organization, failing to hold director / manager meetings and keep minutes or filing actions by unanimous consent.
All of the specifics of the LLC formation process are dependent upon the state (or country) that you live in. Really, you should talk to a lawyer and have them set your paperwork in order.
Once you fill out the initial paperwork to establish your LLC, your state may require you to publish some kind of notice in a newspaper or on a public board and then send in an affidavit to your state’s corporate commission. For example, as of the time of this blog post Ohio and Arizona require all three steps, whereas Kentucky is one of many that doesn’t need a notice of publication.
At this point you’re finished or very near to it (depending on your state). You can then elect to receive an EIN number (again, this is specific to the USA) to use when creating business bank accounts. Business finances is a whole ‘nuther can of worms so I will leave you to consult with a tax and finance professional (like I’ll be doing shortly).
As of this writing in May of 2010 my own LLC papers have been filed, accepted and are awaiting my Notice for Publication papers to be filed at a newspaper. once that is finished, I will have my very own LLC and will be free to take the business where I see fit.
Whew! What a responsibility. Have any of you readers trod this ground before me? Any advice would be greatly appreciated.
(Post updated to include backlinks to previous blog posts on my efforts to start a business. Thanks to Jon Angliss!)