Almost every day Im in the car, and, as a result, almost every day I have my radio on. Thus, Im bombarded by ads of every stripe: Refinance your home for no money down and no closing costs; Need a lift? Get the latest energy drink; and my personal favorite, Dont want to work for the man? Incorporate your business for only one hundred bucks.
Incorporating your business is not a bad thing; quite the contrary, its a very good thing. In fact, entrepreneurs and those that have a proven ability to provide, market and sell a service are what distinguishes our country from all others. However, forming a limited liability company (or any other type of business entity for that matter) is not as simple, or as cheap as the man on the radio suggests.
For the purposes of this column, Im going to discuss the main method people incorporate in Maryland, by forming a limited liability company. It is a relatively straightforward and painless procedure: you draft articles of incorporation and file, along with a relatively inexpensive filing fee with the Maryland State Department of Assessments and Taxation. Upon filing, you have yourself an LLC. Congratulations!
However, without a few other steps, that LLC you just formed is useless. You cant open a bank account with just that piece of paper, nor can you hire employees, enter into a lease, or use any type of trade name you may have planned for your infant business. This, my friends, is exactly what the hundred dollar package will get you. And it costs more than one hundred dollars, as the filing fees arent included in that very, very low price.
That is precisely why the upsell begins. They know (and you might not know) that just by having the LLC on file with the state may not be enough to accomplish your hopes and dreams, or, at the very least, open a bank account. Therefore, theyll try and sell you a gold package or a platinum package, anything for you to give them more money and not realize that the original package actually costs more than what it should and gives you bupkis.
The next stage usually provides you with the employer identification number or EIN from the Internal Revenue Service. The EIN is a requirement if you want to open a bank account or hire employees, or open up a credit card account. This will cost you another 75 to 100 bucks, which is a complete and total ripoff these days, as you can apply for, and instantly receive, an EIN on the IRS website.
Now you have an LLC registered with the state and an employee identification number registered with the feds, and you may not be able to open a bank account. Why? Because over the past several years, banks have been very sensitive not only to the way LLC accounts were used, but also what happens to LLC accounts when the LLC breaks up.
A great many of the LLCs dont have anything in the way of operating agreements so, in the case of a dissolution of the company, Maryland law (which isnt terribly clear on the subject) governs how assets will be distributed to the members. Usually, this distribution takes the form of litigation, which means a bank has to get involved, and likely freeze the accounts of the company while the bad business is sorted out. Banks arent big fans of getting involved in litigation or freezing accounts.
Thus, you need an operating agreement, which will cost you another few hundred bucks. The operating agreement basically states where the business is located, what it does, who the members are, whos responsible for the business and any matters that may arise, and how the company will dissolve in case a member is terminated or the business goes belly-up. Some banks really need to see this, so in case something bad happens, the bank knows it will likely not get in the middle of it.
An LLC is fairly straightforward to set up and get running. However, this doesnt mean that anyone can do it, or has the time to do it. But even if you do, you want to make sure you do it correctly. Because this is the first decision and act you take as a company, and you want to make sure you put your best foot forward.
Christopher L. Markham is a general practice attorney based in Frederick. He can be reached at firstname.lastname@example.org.