Starting a Business with Partners? Make sure to do this First!

Recently four guys from the area contacted me. Together they planned on purchasing over a dozen rental properties. Each brought something to the table: capital to finance the project, construction and rehab skills, accounting and paperwork, and experience with rental properties. The one with the experience was the one who insisted they set up a Limited Liability Company (LLC) and carefully design their Operating Agreement.
The partner with experience knew that often times businesses don’t work out as planned, and reality often differs from projections. So these partners asked me to draft an Operating Agreement that not only detailed how the LLC was to be managed, who had decision making power, what decisions required only one partner’s signature and what decisions required all partners to sign, but also what we call “off ramps”.
“Off Ramps” are designed exit strategies from the business. These can be voluntary or involuntary. If a partner decides to retire and move from the area, an “off ramp” has already been designed in the LLC’s Operating Agreement to allow for voluntary withdrawal. Or if a partner stops pulling his weight and decides to let his other partners do all of the work, an involuntary  “off ramp” exists where that partner’s interest can be bought out based on a pre-determined formula.
If you’re in business with partners, you need to have a carefully crafted partnership agreement. Local area accountants often refer individuals interested in creating an LLC or other business entity to our office. If you’re thinking of starting a business, let us help you get started on the right foot. We can assist you with getting your Missouri LLC up and running quickly.

How do I create an LLC in Missouri?

Missouri has made it easy and inexpensive to set-up a Limited Liability Company (LLC). The Missouri Secretary of State’s website (www.sos.mo.gov) has a system called the “Missouri Online Business Filing System” where one can file an LLC’s Articles of Organization in less than 10 minutes.

An LLC’s Articles of Organization creates the LLC. The Articles of Organization contain the following information:

  • Name of the LLC: The name must be unique to other LLCs in Missouri and must include “Limited Liability Company,” “Limited Company,” “LC,” “L.C.,” “L.L.C.,” or “LLC” in the name.
  • The purpose for which the limited liability company is organized: Often we use a general purpose such as: “The transaction of any lawful business for which a limited liability company may be organized under the Missouri Limited Liability Company Act, Chapter 347 RSMo.
  • The name and address of the LLC’s registered agent
  • Whether the LLC will be managed by managers or members: This is an important choice. Often clients select an option without realizing the full importance of this decision and as a result, their Articles of Organization later have to be amended.
  • The duration of the LLC: Most of the time we select “perpetual.”
  • Information on the individual organizing the LLC
  • Whether or not it is a Series LLC: I will do a blog post on Series LLCs at a later date. From a legal perspective they are new, only created in 2013. They have the potential to be beneficial to individuals who own multiple rental properties. However, as they are so new, there is not yet much case law governing their existence or operation.

The filing fee when filing the Articles of Organization online is a very reasonable $50.00 plus a convenience fee for use of a credit card.

Once you have filed the Articles of Organization, your LLC is officially legally created. Yet, you will likely need to still do a little work before beginning business operations. For example, to open an LLC bank account, most banks will require your LLC to have an EIN and an Operating Agreement.

An EIN is an Employer Identification Number. It is issued by the IRS. You can apply for and receive an EIN online through the IRS website (https://sa.www4.irs.gov/modiein/individual/index.jsp). There is no fee for applying for an EIN. However, clients will often have questions about how to answer questions on the EIN application that they should direct to their attorney or accountant.

The next document is the LLC’s Operating Agreement. The Operating Agreement is extremely important yet is often put together haphazardly by those looking to do-it-yourself. Doing so can be penny wise and pound foolish. Consider a few of the important topics your Operating Agreement controls:

  • the structure of your LLC
  • its ownership and the allocation of profits and losses
  • the members’ rights and responsibilities
  • who manages the LLC and how decisions are made
  • the transfer of ownership through buyout or buy-sell provisions

It is important to make sure this gets done right!

Our firm routinely helps clients set up LLCs. We are happy to file all the paperwork for you or limit our representation to drafting the Operating Agreement. When it comes to starting a new business, we’re happy to help.