Topic: Business Formation
Time Investment: 20 minutes
Suggested Product: Get Legit membership
- What an LLC is
- How you set up
- Why paying Incfile, LegalZoom, or just the state to do it isn’t enough!
Rachel Brenke with TheLawTog. I wanted to do a real quick video on some of the top questions that we have about LLCs or Limited Liability Companies. My little disclaimer for this, as always, I am a lawyer but I’m not your lawyer unless you want me to be. In that case, you can submit through the website and we can sign and get you an agreement and we can do that. So all of this information is going to be for educational purposes only. It’s general information. It may or may not apply to your situation. But I’ve been doing this long enough and work with so many of you who are actually already my clients that this is a pretty good video for you guys to get some guidance on why not to set up your own Limited Liability Company. Just an FYI, we do sell a DIY LLC kit in the shop and we also have the BizRevamp business web course. It’s a legal information course that is stock full of LLC, corporation, set up, taxes, retirement, insurance, contracts, you name it. There’s a bunch of stuff in there.
But as I go into this, I’m well aware that I sell those products. The reason I do that is because I am trying to avoid a couple of things. I’m trying to avoid you guys being completely lost, just jumping onto the state’s website, filling out the forms and thinking that’s enough. This video is going to encapsulate all the other things that the state cannot do for you and that you doing it yourself or paying another service to do for you except for a law firm may not be able to provide you. So we do provide those products, but they’re not the be all and end all. There’s still other things that need to happen. This could actually even be branched out into corporations as well. The reason I’m focusing on Limited Liability Companies or LLCs is because the majority of you are one or two individuals that are working in a photography business with the bulk being solo entrepreneurs, solo business owners. And from my experience, I have found that the business formation of LLC suits the majority of photographers in standard personal portraiture maybe with some commercial as well. It suits you guys the best.
However, there are some things you need to understand. You’re going to see in groups people have said, “How do I set up an LLC?” They’ll link the state and go, “It’s so easy. Do it yourself. You don’t need to worry about going to a lawyer or another company.” And that’s not always true like I’m going to explain in this video. One other thing I do want to identify here, and we can drop the link for this later, I’m not a fan of these companies online that do LLC filings and stuff for you. They also, for me, it’s basically like doing it yourself because all you’re doing is filling out the forms and they’re not going to do these other things that you need to do that a law firm can provide for you. Now I’m not pushing for you guys to come to me. You can go to a local attorney that can help you do that. Just understand that there are extra things that setting up your own LLC or hiring these online services where it’s a waste of money, honestly, to do for you.
Well, first of all, the very first reason to not set up your own LLC is that it may not be the best formation for you now or even long term. One of the things that I love to do, and I think this is because I have an MBA business consultant background, and as an entrepreneur, a photographer myself, is I’m not an order taker as an attorney. When people come into my firm, A, you’re going to become my friend. And B, we are going to talk long term planning. And I think that’s one of the problems with just randomly selecting a business structure is that while it may be good now, it may not be good later and it may be easier for you to select a corporation versus an LLC or vice versa. And also you don’t have the evaluation of tax consequences or tax benefits to you. So the number one reason is the LLC may not be the best formation for you or long term in the future. And the only way you can determine that is we really evaluate what your long-term plan is.
And I understand that it’s overwhelming, that you may not necessarily want to dig into how many years ahead, you may not even think about having investors in the future, bringing on partners. You might not know that. And you, yes, you can change the business entity structure that you are later. You just need to understand that sometimes it’s easier to do it upfront and you want to do what’s going to benefit you.
Let me time out here real quick. This video, I’m not necessarily going to go into all the reasons to be an LLC. This is reasons not to set up your own. Crash course on it real quick. If you have not taken the steps to set up an LLC or corporation, you’re right now personally liable. That is your personal assets. That even includes, so don’t tell me I don’t have any assets, that even includes you because you had income earning potential. And so if a problem happens, and it’s really not if, it’s when, guys, let’s be real. Litigious society, we’re all human, things happen. When an issue happens, you want to make sure that you’re as protected as possible. Side note here, we have a legal biz checklist that’s free on TheLawTog. Thelawtog.com/bizchecklist. And I will update to include that in here. You guys need to go through the steps. Those are all the things that I run through when someone comes to me, whether they want me to do a business audit or if we have a problem because we want to see how protected you are. An LLC or corporation structure where everything is separate from you, the individual person, is we’re going to see if that’s when formative is proper.
So back to our reasons, that was a nice little rabbit trail for you guys. If you want more information on LLC stuff, we have a plethora of articles on TheLawTog that you can check out. So the number one reason is that LLC may not be the best formation for you now or long term. You’ve got to look at your business plan, and you also need to consult a CPA. Get on a small soapbox here. I have a whole article about it. You should be not be relying just on CPAs to advise whether you should be an LLC or not. Okay? You need to partner tax and legal together because just because you may not have any tax benefit to be in an LLC or a CPA tells you, “Oh, right now it doesn’t fit in your plan.” They’re not licensed and versed to advise you on liability and liability protection. That’s the whole point of creating an LLC or corporation is to have that protection between your business assets and your personal assets including you.
The second thing is, and this is a huge one, if you guys have followed me for any amount of time, you know that I do a lot of intellectual property work, especially in copyright and trademark, not so much patents. Copyright and trademark. Copyright typically when it comes to photographs, trademark when it comes down to business names and logos as indicators or identifiers of your business. So the second reason you may not want to set up your own LLC without consulting an attorney and I’m going to get on another little soapbox here. There are good business attorneys out there. The unfortunate thing is just because they’re a business attorney doesn’t mean that they’re an intellectual property attorney. And so what will happen, and this is whether you’re set up an LLC yourself or your attorney may do this or these online companies may just check that state database to see if the name of the business that you want, to see if it’s available.
There are many problems with this. We need to see if anyone else is using it anywhere else in the United States. We need to see if it’s been federally registered. We need to see if … That’s with the trademark office, uspto.gov. You also need to see if there has been a state trademark registration. None of these databases talk to each other. This is showing the value of IP or intellectual property attorneys. So second reason is not to set up your own LLC is you may choose a name that is okay, maybe okay for your state, but it’s not okay because you may end up infringing upon somebody else’s business.
If you will notice on that business legal checklist that we have, one of the very first things that I talk about is choosing the business name. And this even includes if you’ve been in business for 20 years. You need to re-eval your name to make sure that it is okay, meaning you’re not infringing on someone else. And that’s more than Googling, that’s more than checking the LLC database of your state, that’s even more than checking the US PTO database. There’s other searches that need to be done because other people may have priority rights and you may end up being infringing. What does that mean in the end? Your LLC name is going to have to change, your branding’s going to have to change, all the branding, steam and money and time and energy that you put into it will be gone because you’ll have to rebrand.
Third reason not to set up your own LLC. States don’t provide a template many times. I’ve yet to see it. So if you find one, feel free to email me. States, so the state itself, because that’s where you go to register for your LLC or corporation, they do not provide operating agreements, or if you’re a corporation, bylaws. They do not provide this legal document but many states it is required for you to have even if you don’t have to file it with the state. What does this document mean? Whether it’s an operating agreement for an LLC or its bylaws for a corporation, it is the governing document of your business. It is especially important if you have multiple people in the business because it’s going to talk about responsibilities, debts, how people are going to get paid, and all of that. But it’s even important for those of you that are single member LLCs or the only person in the corporation for multiple reasons. One, it may be state required.
Two, you may need to have it in order to set up bank accounts, etc. And three, if you ever have an issue, one of the biggest things, and this is why it’s so important to make sure that you not only just set up the LLC correctly beyond just filing with the state, doing all the things we’re about to walk through, but also if you end up in an issue, do you have a savvy attorney on the other side? I’m going to find out you don’t have an operating agreement and if the state doesn’t require it, the argument is going to be that you haven’t taken the steps to actually earn that limited liability protection and that you may be personally liable. That may not be the be all and end all, but you see where I’m going with that is that this is going to be a piece of the puzzle, the LLC puzzle. So LLC formations are done through the state with articles of organization, but that’s it. That’s where the buck stops. Buck, puck, whatever. That’s where it stops, it’s all of the state provides. From there, you need to have an operating agreement for an LLC or bylaws for a corporation and the states do not provide this. They don’t. Our DIY LLC does provide it, but like all of our other contracts, it’s just a template, it may need to be fine tuned for your state.
You may also have to file it with your state. Again, state may require you have it, whether it’s keeping it in principle place of business on file or actually filing it with the state. They’re not going to hunt you down for that necessarily. Okay? You could think that you have LLC protection, but if you don’t do all the things that you need to do for the state because you set it up yourself and you did one of these efile sites, you can end up not having the protection you thought you had. So that was number three is the States don’t provide the document of a potentially required operating agreement.
Four, the states also don’t provide the lawyer drafted documentation for intellectual property such as your photographs, your logos, your business name, your website, all of that. They may not provide documentation for the intellectual property and assets. So that can even include physical assets of transferred document. Okay, let’s think about this for a second. We’ve been photographing as the lead photographer, only photographer for our business for X amount of time. All of a sudden, we set up as an LLC. Think about it in buckets. When you are a sole proprietor, when you’ve not filed anything, you’re just photographing, you’re the only photographer or you’re the only owner of the business, but you’ve never taken the steps to file, everything’s in one bucket. When you set up an LLC or corporation, the entire point of it is so that you have two buckets, one for business, one for personal assets. So if you have an issue, the only thing that’ll be touched would be the business asset bucket, right? Not your personal assets. That is one of the entire purposes of setting up an LLC or corporation.
Time out here, real quick. Side note. An LLC is not a license. I should’ve said that at the very beginning of this video. We see it a lot in TheLawTog group. An LLC is the formation of an entity. That’s why we have separate buckets. All right, so let’s go back to this number four with this intellectual property and asset transfer document. If you’ve been trucking along in this personal bucket, you have all your assets in here, right? So it’s here. Then all of a sudden, we create this LLC bucket. What mechanism, doesn’t magically happen, what mechanism brings the intellectual property assets and all your physical assets and puts them in the business bucket? Well, it’s not, “Oh, I filed my articles of organization. It automatically gets dumped from one bucket to another.” You have to use a tool and the tool of that is an asset transfer document, which sometimes can be done in a operating agreement when you set up the business as well. Breaking it out just for ease of us understanding.
So number four, the states don’t provide this transfer. So what does that mean? You may have done your articles of organization with the state. It may or may not have an operating agreement. You probably haven’t transferred your assets into the business. Okay? And this is especially important. Maybe if some of you are savvy enough out there you’re thinking long term, “I’m not going to photograph all the time. I may eventually want to sell this.” At the end of the day, what are you actually selling in your business? You’re going to be selling assets and you need to make sure the assets are in the business bucket and not the personal bucket. All right. One, two, three, four five.
Number five. Number five reason you don’t want to set up your LLC or use one of these online e-file sites or you, states don’t provide advisement on limited liability protection best practices. I kind of alluded to this before when I was talking about if I was a savvy attorney on the other side and I know that your LLC doesn’t have a lot of assets and I want to try to get to the other person personally because they may have personal assets. Remember, separate buckets. I’m trying to find a way to get out of the business bucket and go after a personal bucket. What I’m going to look for, and this can happen to you guys, I’m going to look for a way that that individual or that company is an LLC doesn’t deserve, has not been maintaining their limited liability protection.
What does this mean? I know it’s a lot. Okay. Basically the states want you to earn it. It’s not enough that you pay them, it’s not enough that you filed the articles of organization. You may need a operating agreement. You need to make sure that you are putting all the assets into that bucket. So it’s like your leases, you want them connected, all your contracts connected to that LLC. I had a question yesterday from a client. They said, “My clients are giving me checks straight to my name and it’s going into my personal account.” And I was like, “That’s not passing through your LLC. There’s not protection for that relationship. So there’s an issue there.” You want your contracts to be with your LLC and you signing for the LLC. Like Rachel Brenke for TheLawTog. Okay? Or TheLawTog, LLC. That is what we want to be signing. That is some of the things that we want to look at. States don’t provide advisement on this. This is where lawyers can come in play to help you.
Commingling of funds, keeping your personal and your business assets and money separate. That is a surefire way to do, and what I’m alluding at here is called piercing the corporate veil, it’s a way you can pierce through the business bucket and get to the personal bucket that’s holding the personal assets. States don’t provide advisement on this. So if you logged on and just filed your LLC with the state and all of a sudden that’s it, then you probably don’t even have the LLC protection you thought you did.
And, oh, and the last two we can throw together. States cannot assist on employment and tax matters. So this also circles around to the stuff we talked about before with having a CPA. CPAs have a great place to advise you on W2s, paying yourself and all sorts of that. States can’t advise on that. CPAs can. And also when it comes to employment stuff, and I’m not going to go too far down the path in this video because I have a whole bunch of other stuff on thelawtog.com about this. Hiring people, working with second shooters, working with assistants, who owns those photos? States cannot advise on that.
Mere creation of an LLC is not it. Okay? So don’t fall into this illusion that I just file the articles of organization, pay my couple hundred bucks and I’m good to go. You’re not. Majority of you are not. The reason I stopped today to do this video is because in my law practice, we’re having people, and this is unfortunate, here’s another little soap box. You guys should have an attorney to do a business audit for you before you have a problem. Typically people are coming to us after they have an issue. We run through just like that legal biz checklist that you guys can download. I run through all of those and I start looking to see where our weaknesses are, where there’s not limited liability protection, things that they could have done. Do they own the intellectual property? And oftentimes, there’s a lot of bad news and it’s stuff we have to fix and it costs more money, time, and energy in the future.
So that was just a nice little crash course, a little longer than I wanted it to be but that’s okay because I think it’s important to understand that. It’s awesome that you guys have bought into the knowing you need to have limited liability protection, especially in today’s age. But you need to understand these reasons why you should not just set it up yourself. Or if you’ve set it up yourself, go and seek an attorney to … I can do it. This isn’t just a plug for me. You can go to a local attorney to help you even though we have a bunch of attorneys that we contract within all states or as many states as we can. But find one, just find one, it doesn’t have to be me, to do all these other things that we just talked about. And that way, you guys can check the box on that. Only have to revisit every once in a while. And that you can feel comfortable that when you’re out there and you’re hammering out on the roads and you’re getting out to your clients and making business networks, you know that you’re actually protected instead of this false sense of protection that you got just from nearly paying ink file or the state because you’re not fully protected if that’s all you’ve done.
All right guys, if you have any other questions, feel free to reach out. Let me know. We have TheLawTog community group, thelawtog.com, and of course my law firm is eden-law.com. More than happy to help you guys as much as I can.