Starting a business is exhilarating – I love it because it’s fun and challenging. Sometimes very challenging so let us make a few things easier for you. For example, get in an LLC. Read below to learn why these sole proprietorship examples will convince you that an LLC is the way to go. Let’s dive in.
“The Hunter Range” is a skeet shooting course for beginners. The owner, Hunter Holiday, is a master marketer full of novel ideas. “The Hunter Range” is his latest. Along with options for shooting, “The Hunter Range” has a small restaurant with seating overlooking the shooting range. Hunter Holiday has marketed his new business all over the place, including dropping google ads in front of people searching “charleston bachelor party.”
A group of guys heading to Charleston for a bachelor party click on one of Hunter Holiday’s ads and decide “The Hunter Range” sounds fun. Why not pick up a bunch of mini bottles and go shooting? Nothing could possibly go wrong.
The morning of the shoot, the bachelor party was running late so they decided to eat at “The Hunter Range” country store. The cook left salmonella salmon on the counter, which spoiled the bachelor party food, and made everyone very sick. The bachelor party guys all had to go to the hospital. The bride was extremely upset because the wedding the following weekend had to be canceled. Everyone sued “The Hunter Range” to recover their hospital expenses, pain and suffering, the cost of the wedding, inconveniences, and a host of other issues.
Unfortunately, “The Hunter Range” never got around to formally setting up the business. Out of default, therefore, it was a sole proprietorship. When the jury awarded the bachelor party and Bride $150,000 in damages, Hunter Holiday had to close his business and sell his house to pay the sum. He also had to borrow a large portion, on which he now has to pay interest. Lastly, Hunter Holiday was sued personally, as well as the business, so all his private information was exposed – his wife was even deposed (questioned under oath) in the process. To make matters worse, Hunter Holiday recently inherited a piece of family property he owns with his siblings, which is now part of the assets the lawyers are pursuing. What could Hunter Holiday have done?
For starters, Hunter Holiday should have set up a limited liability company (LLC). Not only would it have shielded him from personal liability, but it would have allowed the company to represent itself in the lawsuit and limited the personal exposure of his family.
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How to Start an LLC
First, research your business name. This isn’t required for starting an LLC but it’s a really good idea. The next step is filing Articles of Organization with the Secretary of State’s office – no, not the President’s cabinet member, but your state’s Secretary of State. It’s a simple form. On it, you will be asked to declare a ‘registered agent,” which is the person who will receive all court and tax filings (and some junk mail). Along with the LLC filing with the state, the LLC will pay a fee (which is recurring in some states, but not in most). A tax designation will also be required.
Next, LLCs should have an operating agreement outlining the details of business operations even if you have a single-member LLC. In it, include basic features such as who owns what percentage of the company, what each member is responsible for doing, and how to cash out. You might also include buyout clauses and other information necessary for the continued success of the company. It’s important to think into the future about both the good and bad, then include elements to prevent misunderstandings down the road. This is the LLCs opportunity for clarity on potentially tricky subjects including wages, disbursements, taxes, ownership, and how to remove members. If you have a single-member LLC, then you can use a rather simple form just to show you have 100% ownership; however, multi-member LLCs should take some time with their operating agreement.
Starting an LLC is fairly straightforward – the nuances from state to state differ some, but the concept is the same. If the owners plan on being involved from the beginning, it’s important to use resources like Drafted Legal to assist. If it’s a larger operation with many owners, copious investments, or numerous employees, then use a law firm to help.