Need a business defense attorney in Aurora CO? You’ve probably run into partner troubles, like a unilateral dissolution or breakup of the company, or an improper dissolution leading to a receivership. Maybe you didn’t have a business divorce as they call it, but your partner just stole the assets to the company and created a new LLC without even consulting you. Many clients come to me with these issues, after the fact, and the problem really resides in how they created the business in the first place. There are many pages on the internet devoted to creating a business from the idea forward, but this is from a legal perspective, after dealing with so many issues brought to me in many years of experience.
CHOOSING A BUSINESS ORGANIZATION
For limited liability, don’t open a sole proprietorship, or a partnership. If you have a “silent” partner/investor you could use a Limited liability partnership, an LLP, but as the open partner you won’t necessarily be protected. If you have up to a thousand people with interest in your company you could use an S Corporation (small, or closely held corp.). If you want to raise money by selling stock or interest in your company, use C Corporation status. These are commonly known company types. As we’re all coming to know, a limited liability company, or LLC can do all of these things, and require less paperwork, remain limited liability, and still be organized like an SP, P, LLP, LLLP, S corp., or C corp.
REGISTER YOUR LLC, GET AN OPERATING AGREEMENT
Let’s assume you’ve made the best choice for a startup and chosen an LLC. The next thing to do is register it with the Secretary of State. Many folks think this is the end of it, just submit a report each year and you’re good to go with limited liability. But unfortunately, its not true. You need an operating agreement, and a good one, to consider all the things that can go wrong. Not only that but not any operating agreement will do.
Many of the LLC protections and other details are provided in the Colorado Revised Statutes (CRS),
A person or persons who will be admitted as a member or members pursuant to section 7-80-701 (2) may, by unanimous consent, amend the operating agreement to be effective immediately before the admission of the person or persons.
The CRS refer to terms like Members, Managers, and Operating Agreements. The operating agreement is a contract between the members and details the organization of the business. Businesses can be member managed or manager managed, and if manager managed can be called presidents and vice, administrators, VP of operations or communications, or whatever you choose, but they have to be in there to be protected like a real officer in a real corporation is protected. The agreement also specifies how to add or remove members, what happens when interest is transferred or sold to another, how to dissolve, how much say each partner or member has (voting), how much they have invested (money or sweat equity), and how they get paid (distributions and allocations). Without an operating agreement you’ll just have to admit you’re actually a sole proprietorship, or a straight partnership, without limited liability or very nearly so.
Having a non-attorney set up your business is a track toward failure as well, as they just hand out the same operating agreement to everyone. If you’re an LLC organized like an SP, having an operating agreement written for a multimember partnership LLC is as bad as not having one at all. That’s because you need an operating agreement that matches your organization.
OPERATING AGREEMENTS NEED TO MATCH YOUR BUSINESS ORGANIZATION
Its simple if you consider how limited liability is broken, what attorneys call “breaking the veil”. If the veil is broken, so is limited liability, and if they win the case they can not only go after the business assets, but your home, car, boat, and personal bank and investment assets as well.
The veil is broken by proving that you have operated the business as if it was an extension of your personality, without rules, just making any decision you wanted to. Maybe that is the case, but you don’t want to admit that if you want limited liability and to protect your personal assets from business liabilities, or vice versa, business assets from personal liabilities. That’s why, for instance, you don’t want to choose a partnership with an irresponsible person, because in a straight partnership, every partner is responsible for all the partners’ liabilities, and the assets of any partner can be attached to a judgement against any of them. Nasty right?
Having an operating agreement says “I have a set of rules I have to follow when I make business decisions, unlike my personal life”. So, if you use an SP operating agreement with incorrect rules (like using one for all your businesses), it doesn’t protect the one company that’s an S corp. organized LLC, when all your others are one member pass through sole proprietor LLC’s. Whatever your LLC is organized like, you need an LLC operating agreement that is written specifically to mimic that organization, only its an LLC. If you have 3 companies all organized differently, you need three different operating agreements.
AVOID FAMILY OR FRIENDS
The problem with most business problems is that you didn’t consider having problems at all when you created the business. Its like this for me almost every time. Just because they are friends or family, don’t think you won’t have problems, and don’t need to worry. Worry more about your partners when they’re friends or family, because they’ll do things incorrectly when they assume that you won’t hold them accountable. “Its easier to ask for forgiveness, than to ask for permission”. You’ve heard that one. Most people who have this issue after partnering up with friends or family, don’t have a legal leg to stand on, because they also don’t have anything written down to either prevent issues from arising, or bring people back into line easily.
DO IT RIGHT THE FIRST TIME
Choose LLC, consult an attorney (like me, for instance, at www.mcmechanlaw.com ) for the best organization to match your future goals, and have that attorney put together an operating agreement that matches that organization. Then register your business with the Secretary of State’s office business directory.
After this act of creation, the next step is to look up the licensing requirements for your business. Most cities have business licenses that you have to purchase, and have more requirements for some businesses like bars, taverns, and distributors, marijuana businesses, hair dressers and other groomers, etc..
TAXES, BANK ACCOUNTS, PROFIT AND LOSS
Finally, before you start making money, you need an EIN number from the IRS for taxes, or for employees, unless you’re a sole owner with no employees. Sole ownerships can be passthroughs and use your own social security number. With the EIN or SSN, and Articles of Organization and letter of Good Standing from the Secretary of State’s office, you can create bank accounts for your business. I recommend one for money in, and another for business operation/checking at a minimum. After that you’ve got the minimum, but you still need to be able to track profit and loss, so you can grab all the deductions you’re legally entitled to.
You could go to Quickbooks online at https://quickbooks.intuit.com/ and use their advice with Youtube and possibly an accountant (maybe definitely an accountant?) and create a great table of accounts to properly prepare yourself for running a business and paying taxes. Without this you won’t know how much to pay, and you’ll have greater expenses later. Literally, there are so many deductions you can take, the only way to miss them is to not organize anything.
You can always change your organization later if you want to involve many more partners, or sell stock, or maybe buy out all your partners the correct way and then reorganize as a single member passthrough. Anything can be done properly, the correct first step is to call me, every time, before you change anything. Even walking away, call me first. Having harsh words with your partner? Maybe call me before you have that conversation. I mean really, lawyers have retainers for a reason.
But do it right, call me first at 720-249-7852, and I’ll tell you how to create your business correctly, or if you’ve organized yourself correctly how to make that partner realize just how badly they’ve screwed their interests up, or how to buy out or dissolve properly. Legally, as in the IRS won’t come after you later. Which they will if you don’t. And if you think that’s bad, Colorado revenue is even quicker to the punch than the IRS.
AGREE TO AGREE
Ok, final and best advice: Get along with your partners. Agreements is a word I like better than contracts, because a contract has the word “con” which is Latin for against, while agreement has the word “agree” in it. Its better to agree with each other than it is to be against each other. Its better to gain agreement for what you want by offering something in return, rather than disagreeing and creating hard feelings.
The agreements you make with each other are communications that you admit to mutually agreeing together, including management, voting rights and percentage of ownership, and what happens when you disagree. You must decide ahead of time what is decided by vote, when unanimous consent is required, and who gets to make that crucial decision. Otherwise, you’ll have problems, and you’ll come to an attorney like me, and you’ll pay me to solve them.
COLD HEART, CALM MIND
Finally, don’t let business get personal. When you have personal problems don’t bring them into your business decisions. When you have business problems, don’t insist that others be punished, instead just focus on becoming whole. Hire an attorney, for any problems that require negotiations or legal action, get to a number you can live with and move on. If you can’t live with the number and go to court you won’t have that choice at all, the Court will decide. I know of one situation, where a client whose issue was lost to them in negotiations, then lost them a house (sold to pay for legal fees), a marriage, and then lost appeal after appeal after appeal. The moral of the story is calm down, do it right in the beginning, hire help before you need it, and move on to something better each time. Build those assets, protect them, and pass them on and create what we all want, the true American Dream: Generational Wealth.
Samuel McMechan, Esq.
JD, Licensed Attorney
(Member of the Colorado Bar Association, and Arapahoe County Bar Association, Martindale/Nolo/Lawyers.com Silver Champion for actual peer and client reviews)