​Limited Liability Company Formation

​Whether you are considering a limited liability company formation for a new or existing business there are a few things you need to take into consideration before forming one. If it will be a single member LLC then of course the decisions are much easier and most of the remainder of this page won’t even apply to you. Make sure you do your research before completing your Limited Liability Company formation, and if in doubt, call your local and state government with any questions or an attorney or accountant depending on your particular situation. If you don't know how to draft an Operating Agreement and need some assistance, feel free to contact me. 

​Single Member Limited Liability Company Formation

If it will be a single member LLC you probably just need to have a short conversation with your accountant to let him know your intentions so you can discuss getting an ​EIN (Employer Identification Number) from the IRS and what other state laws might apply. Your accountant can also tell you what type of record keeping you may need to do, whether or not you may need a bookkeeper to handle data entry on QuickBooks or if the business is small enough to possibly handle everything with a checkbook, receipts and a general ledger.
For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and affirmatively elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.
If a single-member LLC does not elect to be treated as a corporation, the LLC is a "disregarded entity," and the LLC's activities should be reflected on its owner's federal tax return. If the single-member LLC is owned by a corporation or partnership, the LLC should be reflected on its owner's federal tax return as a division of the corporation or partnership. 
I usually start by sending my clients a questionnaire to get some needed information before we meet. This is the same whether it is for a CT LLC formation or I am dealing with a different entity structure or state.

Will My Business Require a State License or Registration?

Before starting your limited liability company formation you should research the various state laws regarding your type of business. Depending on the type of business you are running, you may need a specific license or permit. In Connecticut for instance, the Connecticut Home Improvement Act requires you to register with the Department of Consumer Protection, whether you are an individual or business entity if you are contracting with a consumer to perform home improvement work on residential property.  “Home Improvement” work is broadly defined as any permanent change to residential property, including but not limited to driveways, swimming pools, porches, garages, roofs, siding, insulation, flooring, patios, landscaping, painting, fences, doors and windows, and waterproofing.
 
Private employment agencies must be licensed by the Connecticut Department of Labor.  Real estate appraisers  as well as real estate brokers require testing to obtain a Connecticut State license.  Homemaker Companion Agencies  require registration.  “Homemaker-Companion Agency” means any public or private organization, employing one or more persons engaged in the business of providing companion services or homemaker services. As you probably know, plumbers, electricians and HVAC contractors also need to be licensed in addition to registering as a home improvement contractor.
One of the newer registration requirements involves a pilot program for hemp manufacturing which has a rigorous set of standards for sample collection and testing.
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Most States, Including CT May Require a Sales and Use Tax Permit 

You must obtain a Sales and Use Tax Permit from the Department of Revenue Services if you intend to engage in any of the following activities in Connecticut:

• Sale, rental, or lease of goods;
• Sale of a taxable service; or
• Operating a hotel, motel, or lodging house.

You must obtain a Sales and Use Tax Permit  before making any sales. If you are purchasing an existing business, you may not use the Sales and Use Tax Permit issued to the previous owner. You are required to obtain a new Sales and Use Tax Permit if you will have more than a single place of business, you must obtain and display a Sales and Use Tax Permit for each location.
The requirement to obtain a permit applies to individuals, corporations, partnerships, and all other business entities that will make sales in this state, regardless of the number of sales that will be made or the amount of tax that will be collected. These rules do not apply to casual or isolated sales, which are infrequent sales of a nonrecurring nature made by a person not engaged in the business of selling tangible personal property or taxable services.  Manufacturers and wholesalers, as well as retailers, must obtain a permit.
As a seller, you are responsible to collect sales and use taxes and you are liable for their payment whether or not you collect them as required from your customers. You must file returns and pay the full amount of tax due DRS.  Failure to obtain a tax permit will result in a fine of not more than $500 or imprisonment of not more than three months, or both, for each offense. 

​Basic Information needed for Limited Liability Company Formation

Once you have done your research and are ready to form the LLC you should have the following information ready:

1.  Name of LLC
2. LLC Purpose
3. Principal Place of Business
4. Name and Address of Registered Agent
5. Manager Managed or Member Managed?
6. Tax Treatment? (Disregarded entity, partnership or corporation)

​Management of the Limited Liability Company

​If there is more than one member in the LLC, then you must decide who will be managers and who will be just members with no management authority and no authority to bind or enter into contracts on behalf of the LLC. Usually small two or three member LLCs operate as partnerships and each member is also a manager. On the other hand if you have a silent partner situation where one or even two partners were founders who supplied some financing or equity investment, then they may simply take the title of members or non-managing members since they will not be active in the day to day running of the business. Another option that is also available for LLCs is to have a manager or managers that are not a member, meaning that those mangers have no equity ownership, but they have management responsibilities. An example would be a restaurant that has a day manager and night manager to supervise the employees, order supplies, handle customer complaints and make decisions on a day to day basis as necessary. 

​The Operating Agreement

Partnerships have partnership agreements and corporations have shareholder agreements and management agreements. Limited liability companies have what are known as operating agreements which are actually a combination of a shareholders’ agreement and management agreement. There are a numerous issues that are involved when two or more parties get together to agree on a written contract between them. Each operating agreement should be tailored to the specific business and the specific understanding of the parties involved. I do not recommend using a boiler plate form found on the internet, although that may be a good starting point to do some research before contacting an attorney to have your operating agreement drafted.
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Some key questions that need to be answered in every operating agreement include:

• Roles and responsibilities of the members and managers.
• Voting rights.
• Will the members draw salaries or only be paid from the profits?
• How will new members be added?
• How will competing business interests and conflicts of interests be handled?
• How are potential offers to sell the business handled?
• How are capital contributions handled if additional capital is needed?
• How are decisions to expand the business or make other acquisitions handled?
• What if a member defaults in his or her duties? Can they be bought out?
• How are disputes among the members to be resolved?
• Can a member or manager be replaced for violation of the operating agreement?
• Can a member sell his or her interest to a non-member?
• What if a member passes away or is disabled and can no longer work?
• Is key man insurance necessary?
• How is a potential buyout between members handled?
• How is the decision to dissolve the LLC made?

​Conclusion

As you can probably see, a limited liability company formation can range from the simple to the complex. It is important to not act hastily and get proper advice before taking the plunge, not just with limited company formation, but with starting any business venture. Proper research, planning, drafting of the operating agreement and structuring of the business will go a long way to avoid future problems and have a system in place for dealing with problems as they arise.