If you are setting up an LLC for Buying and Selling Houses, please heed this advice.
Brian Gibbons
REISkills.com
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Limited Liability Companies (LLCs):
Avoiding Disasters, Mistakes and
Confusion!
By Darius
M. Barazandeh, Attorney at Law / M.B.A.
I
see it several times per day, everyday:
An LLC disaster waiting to happen!
No matter where I travel or with
whom I speak, it’s clear that small to
mid-sized business owners are not
getting proper instruction on how to
create, run, and maintain a ‘rock solid’
LLC. Did you or your attorney form
your LLC? Are you now left with a stack
of papers and confusion?
One comment that I repeatedly hear is,
“Well, my attorney set it up for me two
years ago…so everything is rock solid.”
Usually, without much probing, I soon
learn that little else has been done
since then. I will typically find that
even the attorney may have missed a few
steps along the way! In fact, we have
uncovered 24 mistakes/traps that LLC
owners face all the time! Many of these
mistakes are even made by attorneys,
experienced business owners, and very
talented people. So if you want to
avoid disasters and create a ‘rock
solid’ LLC…let’s get started!
While I can’t cover all 24 mistakes and
traps in this article, let’s talk about
the
first 5 mistakes in
some detail: 1)
THE ‘FATAL DEATH’ PERSONAL LIABILITY
CLAUSE –
A handful of states have a strange
option in their articles of organization
forms which can be
d-i-s-a-s-t-r-o-u-s. Some states
require the filer to select whether or
not LLC members will be
personally liable for the business
debts of the LLC. Obviously, members
should not be personally liable
for LLC debts and obligations! This
is the reason you are forming an LLC to
begin with…remember? Carefully read the
articles of organization or similar
formation documents in all states. Make
sure that you and your attorney do
not accept member personal
liability for business debts. If you
had an attorney or filing service submit
your organizing documents for you, then
it is always a good idea to ‘double
check’ this area. Make modifications if
needed. You would be surprised how many
times it’s a secretary, legal assistant
or clerk who actually completes your
precious articles of organization.
Just because a box exists, this does not
mean you should ‘checkmark’ it!
2)
NoT MAINTAINING ‘REQUIRED’ RECORDS – Here is an area where much
confusion exists. When I talk about
required records, I almost always get
the same response, “I don’t want
to keep records…that’s why I chose the
LLC over a corporation!”
Hold on one minute…because
you may be surprised to learn that
almost every state requires the LLC to
maintain certain key records. In fact,
maintaining ‘key records’ is one of the
few ‘formalities’ that states do
impose on the LLC. As a result, this
can be a prime target area of attack if
a suing attorney, the IRS, or a
bankruptcy court wishes to ‘set aside’
or ‘penetrate’ the LLC.
We have reviewed this area in much
detail for all 50 states and D.C., and I
can tell you that each is different.
Regardless of what your attorney,
accountant, best friend, or local guru
tells you, this is a MUST DO
area! Some common records include:
copies of resolutions, unanimous consent
forms, copies of meeting minutes, tax
returns (from 3 to 6 years), the names
and addresses of all current and former
members and/or managers, a copy of the
operating agreement and more!
3)
FAILING TO UnDERSTAND and REVIEW YOUR
OPERATING AGREEMENT – This is an all too common
mistake. The operating agreement is
perhaps the most important document
of the LLC! The operating agreement is
an ‘internal’ set of rules for the
company. It is basically a contract
among members of the LLC. Even if you
are the only LLC member this document is
very important! We continually find
that many business owners have a generic
operating agreement that has never been
reviewed or even signed by members!
Even worse, most operating agreements
are usually missing some KEY
components. In fact, we have isolated
43 to 45 key components that must be
included in almost all operating
agreements. Most canned and even
‘customized’ agreements only contain
about 25 to 30 of these components. At
a bare minimum, you should understand
what the ‘best practices’ are regarding
operating agreements and then compare
this ‘gold standard’ to what you have.
Special tax treatments for the LLC (such
as the popular S-corporation tax
treatment under Sub Chapter S) will
require additional terms and controls!
4)
Failing to Complete the ‘Big 10’ after
forming the LLC: It does not matter whether you
file the LLC paperwork yourself, hire an
attorney or other service these things
must be completed. This is one mistake
we see over and over again! Most
business owners routinely forget to
complete the ‘Big 10’ important steps
within 30 days of forming the LLC. Here
are 7 of the steps:
a) Conduct the First Organizational Meeting
of the LLC
– This is really important and will
allow you to create solid safeguards and
‘often forgotten’ controls. There are
about 11 things that should occur at
this meeting!
b)
Obtain Employer’s Identification Number
(‘EIN’) from the IRS
c) Register Your Business Name with the
County Name Registrar
d)
Register with your State Department of
Revenue and Comply with State Sales Tax
Rules
e) Collect Member Capital Contributions and
Transfer Cash or Hard Assets into the
LLC
(With proper instruction this is
simple…if done incorrectly a liability
disaster can occur!)
f) Obtain the Proper Business Licenses
g) Review Insurance Coverage Needs and
Limitations
5)
Failure to properly evaluate and choose
your team of PROFESSIONALS: This is perhaps one of the
toughest things for the real estate
investor and small business owner to
do. Part of the problem is that most of
these professionals (e.g., attorneys and
accountants) will know more than the
average business owner regarding legal
and tax issues. Sometimes the big
mahogany desk and the plush office will
make them seem even smarter! Take it
from me, ‘ivory tower’ law and
accounting programs really don’t teach
you how to run an LLC for maximum tax
savings and asset protection. It seems
to be a lost art these days! The truth
is that the competency of legal and tax
services can range from great to
very poor!! You need to be able
to evaluate this for yourself!
The challenge is that most people who
contact an attorney or accountant rarely
have a true
two-sided discussion! After all, it’s
nearly impossible to ask the right
questions and comprehend all your of
options unless you fully understand
the choices and variations available.
THE ANSWER:
Educate yourself first!
One thing that I have learned over the
years is this: NO ONE WILL CARE AS
MUCH ABOUT YOUR BUSINESS AS YOU!
It may be sad but accept this today…in
fact, RIGHT NOW! Take advantage of top
quality home study systems and detailed
instruction. Learn about your options
and the ‘best practices’ for real estate
investors and business owners. Seek out
those who want to help and EDUCATE!
Then when evaluating an attorney or
accountant you can ask them the ‘tough’
questions and see if they can answer or
if they squirm!
Doesn’t this sound like
a better position to be in? You will be
better able to choose your team and you
can ensure that the person who
about your
business
can make informed decisions about the
business!
