There are a large number of steps involved with the process of setting up a business. So many, in fact, that can be daunting to the entrepreneurially-minded and prove overwhelming.
Understanding the latest legal requirements for starting a business is therefore pivotal to the life of the new business or whether it even gets off the ground. A vital facet of this is understanding the importance of different steps within this process of building a business.
Preliminary Steps
Before a business can be legally recognized by the state in which it is applying for, there are several preliminary requirements the owner must ensure are completed.
The first requirement is for the owner to select the state in which the business will be operating – this is important because the rules governing the legal requirements of the formation of a business differ between states.
It is recommended for most people to set up their business in the state they reside in. However, if their business’s physical presence will extend out of this state into others, it will also need to apply for a foreign LLC in those states as well.
The next important step is to secure funding for the business. It’s no secret this is required to start a business, though funding should not only cover startup costs but the business costs following it as well.
Calculating both as accurately as possible enables the owner to make the most informed decision when deciding between the different sources of funding: bootstrapping, friends and family, small business grants, and small business loans.
The owner of the requirement will now be required to decide on the structure of their business. For this, the five most common formats are sole proprietorship, partnership, limited liability companies (LLCs), and corporations.
It is recommended that small and/or new businesses opt for the LLC structure since it is easy to maintain and has favorable treatment.
Once this has been sorted out it is time to form the business. If the LLC structure is chosen (as recommended), a well-beaten path of common steps for formation exists: choosing a registered agent, getting an Employer Identification Number (EIN), filing formation documents, and drafting up an operating agreement.
Importance of the Operating Agreement
For the most part, businesses registered as LLCs are not legally bound to draft an operating agreement; this is only the case in California, Delaware, Maine, Missouri, Nebraska, and New York. Despite this, operating agreements are strongly recommended.
It is useful in the case of both single and multi-member LLCs: for the former, it will help prevent misunderstanding by setting clear expectations about the partners’ roles, whilst for the latter, it brings credibility to the LLC which helps ensure its limited liability status is upheld in court.
The importance of an operating agreement cannot be understated. A common mistake is to pursue the ‘do-it-yourself- avenue, which has sadly exploded in popularity due to the advent of online templates that can be downloaded for free.
The problem with these is that they are rarely comprehensive and often the individuals reading them have no clue what they say before signing and moving on.
A large amount of grief and gratuitous legal hassle can be avoided by simply taking the time to tailor and understand the documents from the outset. When reviewing initial documents, the owner must take the time to ensure its stipulations make sense for their company, and that the processes set forth are clear and precise; these must be tailored to the LLC (e.g. what is to happen in the case of a deadlocked vote, or if a majority owner is killed?).
After the operating agreement has been completed it does not need to be filed anywhere, though some states require the filing of their initial reports or publish notice of their formation. All that remains to do once this is sorted is to get an EIN, a business bank account, some insurance, and register for state taxes.
Concluding Remarks
Operating agreements are extremely important to ensure the proper functioning of an LLC. While their use is not legally compulsory, it is strongly recommended regardless as it can save an LLC’s members a significant amount of grief.
To read more about the strongly recommended operating agreement, please refer to The Really Useful Information Company’s (TRUiC) comprehensive guide on the subject.
