Create an LLC, Maintain an LLC: How STARTright helps LLC Owners

STARTright Available for Utah LLC, California LLC and Arizona LLC

For those who do not know, STARTrightllc.com is a new web site where business owners may go to create and maintain an LLC.   The Utah LLC was the first to be available this summer in July.  The California LLC and the Arizona LLC followed quickly in  late July early August.   The main question I have heard from individuals however is, “What do you mean we can create an LLC and maintain an LLC?  Let me make this simple.  I will divide the STARTright LLC services into the “Form an LLC”  and the “maintain an LLC” functions of the website.

Form an LLC

STARTright is based on the solid legal research that shows that in all states, the LLC may be structured into 16 main LLC types.  These 16 LLC types are based upon 3 different factors.  Those factors are:

1. The number and type of members in the LLC
2. The management structure of the LLC
3. The tax structure of the LLC

From these three factors comes a numerous, but finite number of LLC types that may be formed.  STARTright takes these three LLC factors and builds its decision making process based on the three LLC factors.  Let me explain.   

When I was a kid, we read these books called “choose your own adventures”.  You would start the book and read along until you came to a point in the story where the hero (which was supposed to be you) had a decision to make.  If you chose decision “A”, you would turn to a page in the book that took up the story based upon that decision.  If you chose decision “B”, you went to a page in the book that took the story up from choice B.   By the end of the story, you had made 9 or 10 decisions.  If you laid out the decisions in a flow chart, it looked something like this.

 

LLC choose your own adventure

The way in which we have structured the LLC creation process in STARTright is very much the same.  The critical part of the LLC formation formula is not laying out the “choose your own LLC adventure” correctly.  As business lawyer, I have done that numerous times and understand how that works.  The critical component to STARTright working is whether the business owner who is using STARTright understands his options based on those LLC factors sufficiently to make the decision that will meet his business needs.   

The STARTright LLC video collection was developed to help the user understand the concepts surrounding the LLC.  At each step in the LLC creation process, the user can watch a video that explains concepts about the LLC.  By watching these videos the user understands where he or she is at in the decision process and can make the right choice and build an LLC that fits their needs.  These choices build the LLC articles of organization and a decision specific LLC operating agreement.  If the user then runs the LLC by this user agreement, they will ensure the protections promised them in the state LLC Act.

Maintain an LLC

STARTright maintains the LLC in three ways.  First, when the user receives the Articles of Organization back from the state, the user can log into the My STARTright portal and may enter the LLC state file number and date of formation.  Following this, a list of tasks that are commonly necessary in the state to finish proper business setup will appear in the tasks list.   By following these tasks, the user can get all of the necessary business registrations finished.  The second way in which the My STARTright portal helps to maintain an LLC is to provide a place for documents to be kept.  Most people struggle to hold on to their Articles of Organization and Operating Agreement.  In both cases, you can print these documents off, and then upload a signed copy.  This will ensure that you always have access to the most recent copy of your LLC documents.  The final way the LLC is maintained in the STARTright portal is to remind the LLC owner of any state filings that must be made. 

STARTright is the most efficient way to form an LLC on the web.  For a Utah LLC, California LLC or Arizona LLC, the cost is a mere $149 to create an account.  Once this account is set up, you can create multiple LLCs all year.

Follow Up To LLC Part 1: Getting that other LLC Member

Last week one of the readers left me a comment asking me whether or not he could use his spouse as the minority partner.  Here was my comment:

Generally the best way to avoid losing charging order protection is to get another member.  Because you do not want to lose control, it is best that you give that member a very small portion of the LLC.   I will write a post on this later, but most states give the LLC members a great deal of flexibility.  The California LLC Act allows members to break free from the California LLC Act’s standards by writing into an operating agreement the way the members want the LLC to operate.  This means you can make the call.  You get to write this operating agreement in a way that benefits you as the primary member.   If the other member has 5% or less, and decisions are made by a 65% member or manager vote, (corporate super majority) then you really can run the LLC on your own terms. You need to make sure you address two things however.  

1. Either you need to also write into the operating agreement that the members holding 65% or more do not need to notify the other members to make these decisions, or you need to always call some sort of phone or other meeting when you are making decisions that would generally require a meeting of the members or managers.  It is always good to show that you are following what is in the operating agreement.
2. Second, if you have another member, the money has to be split their way also.  Make sure you assess the tax consequences and necessity of giving that member his portion of distributions if you distribute money out.

A spouse is not a good option for a junior member. The point is to distribute the injury of having an unwanted member in a bankruptcy suit. You and your wife are considered one.

Definition of an LLC: Part-1 The Single Member Hitch

Especially useful for small business owners, the LLC can mold to almost any business model.  Most of the concepts explained below are better explained in the STARTright videos available in your member account.  Limited Liability Companies mesh the best parts of the corporation and partnership.     

Like anything, an LLC is weak when used in ways it was not intended.  I am writing a series of blog entries addressing best practices when using an LLC.  As always, I will follow the STARTright philosophy and try and convey basic concepts using visual diagrams.  This allows you the business owner to make the right decisions.  

Today, lets talk about single member LLCs. Unlike partnerships or corporations, the limited liability company provides two directions of protection.  

• The corporate veil protection: The veil protects the members personal life if the LLC is sued.

LLC has Corporate Veil Protection

• The partnership / charging order protection: The charging order protects the company and the member’s investment if one of the members is sued in his or her personal life.

 

LLCs receive Partnership Charging Order Protection

Single member LLCs are potentially weak if the owner is hoping to protect the LLC if he gets sued himself.  I say potentially, because in law everything is a matter of a two step analysis:

1. Initial Philosophy: laws are usually created to meet a societal need.   
2. Evolving Trends: After a law is introduced, the courts assess whether to change the original interpretation of the law to meet evolving societal needs. 

The original charging order philosophy protected guys A, B from having to accept D as an unwanted partner if C, the person they originally went into business with gets sued.  They don’t want to have to deal with D.  

 

LLC charging order protection intended to stop unwanted partner.

To prevent this unwanted member scenario as shown in figure 3, the charging order is all D can get out of C’s membership as shown in figure 2 above.  The charging order limits D.  He must wait for A and B to decide to distribute money.  No distributions = no money. 

The Single Member Hitch: When a the member of a single member LLC is sued, there is no other members to protect from D.

 

LLC has no one else to protect.

Two bankruptcy courts have used this flaw in the LLC protection to allow creditors of a business owner to completely take over his LLC and liquidate it for cash.  The first case was in Colorado and the nation held its breath to see what would happen next.  The next case was in Idaho and actually used the Colorado case to base its decision on.  This means the trend is starting to move in the direction of denying charging order protection to single member LLCs.  The two cases are linked in pdf format below.  Next I will talk about how a single member LLC owner can remedy this problem.

Albriet: Colorado Bankruptcy Case

A-Z Electronics: Idaho Bankruptcy Case