START YOUR COMPANY PAPERWORK By Wendy Byford

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3 START YOUR COMPANY PAPERWORK The workbook companion to the elearning module Start Your Company Paperwork with Wendy Byford & Gary Bauer

4 Start Your Company Paperwork is one module in The Foundation Series of the Start Your Business small business advisory program. The module includes this workbook and an elearning recording. This publication and the accompanying recording are designed to educate and provide general information regarding the subject matter covered. However, laws and practices often vary from state to state and are subject to change. Because each factual situation is different, specific advice should be tailored to the particular circumstances. For this reason, the reader is advised to consult with his or her own advisors regarding that individual s specific situation and should not to rely on any situation, regardless of the similarities, discussed herein. Any names, characters, places, companies and incidents are either the product of the author s imagination or are used fictitiously, and any resemblance to actual persons, living or dead, businesses, companies, events or locales is entirely coincidental. The author has taken reasonable precautions in the preparation of this recording and e-book, and believes the facts presented in the recording and e-book are accurate as of the date of publication. However, neither the author nor the publisher assumes any responsibility for any errors or omissions. The author and publisher specifically disclaim any liability resulting from the use or application of the information contained in the recording and e-book, and the information is not intended to serve as legal, financial, tax or accounting advice related to individual situations. Copyright 2009 MSP Financial, LLC Published by Chrysalis Business Systems, LLC All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the written permission of the publisher.

5 Start Your Company Paperwork 5 CONTENTS 0BFiling with the State is Just the Beginning... 6 Why You Need a Minute Book... 6 Preserving Your Corporate Veil... 7 Justifying Your Tax Benefits... 7 Setting Up Your Minute Book... 8 Structuring Your Book... 8 Title Page... 9 Summary Sheet Legal and IRS Documents Agreement BMinutes Certificates Membership Roll or Shareholder List Miscellaneous Company Seal IRS Forms State Tax ID State Filings Licenses Fictitious Business Names Foreign Registrations Miscellaneous Next Steps B Resources for Start Your Company Paperwork BYour First Entity Solution BPaperwork Resources BTo Learn More Appendix A Example of minute book Summary Sheet Appendix B Overview of an Operating Agreement... 27

6 Start Your Company Paperwork 6 START YOUR COMPANY PAPERWORK 0BFiling with the State is Just the Beginning If you have been working with an incorporation company, CPA or attorney, you already know that to form a legal business entity 1 you need to file documents in the required format with the appropriate government department for your state and pay the required fee. Once the documents are processed, the state will send back proof of filing in the form of a copy of the filed articles or filed certificate of formation. It may also include a letter, a state certificate or charter. If these documents are all that you received, you may think that your company paperwork is finished. In reality, however, you have just started. There are many other documents you will need to create and others you will need to file before you are properly organized. Why You Need a Minute Book The first document to prepare is a company minute book. A minute book or corporate record book can come in many formats; however, it is generally a three ring binder that holds your filed articles; a printout of your federal Employer Identification Number (EIN); your company operating agreement, bylaws or partnership agreement; organizing minutes; on-going resolutions including annual meeting minutes; certificates of ownership or share certificates; and a list of members or shareholders. If you have reviewed Your First Entity Solution 2F, you know how important it is to document important legal, tax and financial decisions. This documentation helps to prove that you are running a professional organization separate and distinct from you, the owner. The signed meeting minutes and written consents in your minute book show that you are acting as a responsible manager or officer of your company 1 An entity is an organization with an identity separate from the identities of the owners. In this series, we use the term Entity as a generic reference for any business organization such as a corporation, limited liability company or limited partnership. 2 For more information on Your First Entity Solution, see the Resources chapter or go to

7 Start Your Company Paperwork 7 and that you have asked someone at the correct level of authority, in accordance with your bylaws, operating agreement or limited partnership agreement, to approve your decisions and actions. This proof is important even if you are the sole manager and owner of your company. The fact that you are both the manager asking for and the owner giving approval does not matter. Without the signed minutes and resolutions to show that you have separated your role of manager or officer from your role as owner or director, it is much easier for the Court or IRS to decide that you are acting as an unincorporated sole proprietor would act. The consequences of this decision are significant. Preserving Your Corporate Veil A court of law - and the Internal Revenue Service (IRS) - looks for proof to justify preserving intact the walls that stand between your business and you, the individual. These walls protect you and your assets in the event your company is sued, and they are called your corporate veil. During a lawsuit, if you cannot provide proof that you are running your business in a manner that clearly distinguishes the business from you, the owner, the judge will conclude that the business is merely an extension of you personally and allow the opposing attorney to pierce that veil in order to gain access not only to the assets of the business but to your personal assets as well. Managers of all professionally run companies document decisions that have a significant impact on the company. If you can show the court an up-to-date minute book with all your decisions carefully documented and approved, you are one step closer to proving that you are running a professional organization in your entity so your corporate veil should be preserved. Justifying Your Tax Benefits The IRS also is looking for proof that you are running a professional business, not a hobby, and that you deserve all the tax benefits you have been claiming, even if you are not

8 Start Your Company Paperwork 8 yet making a profit. If you cannot produce that proof, then they will try to claim you do not run a legitimate business and the deductions you have been taking should be disallowed, raising your taxable income. Then they will demand back taxes plus interest. A court case in which your corporate veil has been pierced just makes the process easier for them. During their investigation, the IRS may conclude that you are running a business, not a hobby; however, if your corporate veil was pierced, and previously you had elected to be taxed as a small business under sub-chapter S of the tax code (S tax election), they may claim you are really operating as a sole proprietor and will want additional self-employment tax plus interest. In either case above, the results are costly. Setting Up Your Minute Book Structuring Your Book If your incorporator did not provide a minute book for you, you can create your own or purchase one online from the several companies that offer this product. If you purchase a minute book, make sure that you review the contents carefully using this workbook as a guide. If you would like to create your own minute book, just follow the instructions in these pages. To create your minute book, you will need a three ring binder, page dividers and some transparent page holders. With the dividers, set up the following sections: 1. Legal & IRS documents 2. Agreement 3. Minutes 4. Certificates

9 Start Your Company Paperwork 9 5. Membership Roll (if you have an LLC), Shareholders List (if you have a corporation) or Limited Partner List if you have a limited partnership. 6. Miscellaneous While certificates for LLCs and limited partnerships are optional, they are a good idea to include as they provide proof of ownership. Title Page The first page of the binder is the title page. It should state that this binder is the record book for your company. For example: RECORD BOOK OF HAWKINS INVESTMENTS, LLC a Nevada Limited Liability Company or Corporate Minute Book, Certificate Book and Stock Ledger of JOHNSON ENTERPRISES, INC a Corporation organized under the laws of the state of California

10 Start Your Company Paperwork 10 Summary Sheet The second page should be a data sheet, created solely for your convenience, summarizing important facts about your company. You can title it as shown in the following examples: Hawkins Investments, LLC Limited Liability Company summary sheet or Johnson Enterprises, Inc. Corporate summary sheet On this sheet, you can list the following: the date of organization or incorporation the state in which the entity was filed the company Employer Identification Number (EIN) the principal place of business for the entity the names of the managers of the LLC, the names of the officers and directors of the corporation or the names of the general partners of the limited partnership. You can also list the names of the members and their percent interest in the LLC or units of ownership, the names of the shareholders and the number and class of shares each holds, or the names of the limited partners and their percent interest in the limited partnership. This page is not a legal document, but rather a quick reference for the secretary of the company and other individuals who deal with company paperwork. It can be replaced with a page containing updated information at any time. For example, if you amend your articles, you can add a date of amendment to the page. For an example of a summary page for an LLC, see Appendix A.

11 Start Your Company Paperwork 11 Legal and IRS Documents This first section should hold your government and IRS documents. When your entity is formed, you should receive file stamped articles or a certificate of formation from the government department that deals with entity formations in the state where you filed. In some states, different entity types are processed by different departments. You may also receive a welcome letter, charter, or state certificate along with your articles and a receipt for the fee paid. As a courtesy, the state may include forms that need to be filed within the first few months following the entity s date of formation. Make sure that you read everything you receive as soon as it arrives. Putting the packet aside for later could result in your owing penalties because you did not file one of the required documents on time. For more information on staying in compliance after your entity is formed, see Start Your Company Compliance 3. Legal formation documents need to be kept in a safe place. They are proof that your entity was legally filed and the required fee was paid. If you do not have a fire safe in which you can keep your minute book, keep photocopies of important documents in your minute book and keep the originals in a safety deposit box or other safe location. Often originals cannot be replaced. In addition to the filed articles or certificate of formation, you will want to keep in this section copies of any documents filed with the state after your entity is set up. These documents may include an initial report, such as a Statement of Information, and annual filings listing information about the company and its managers or officers and directors. If you file your annual reports online, remember to print out any receipts for fees paid in addition to a final copy of the information provided. 3 Start Your Company Compliance is one module in the Foundation Series of the Start Your Business small business advisory program. For more information go to

12 Start Your Company Paperwork 12 The documents in this section may also include formal requests to change information, such as the name and address of your registered agent, resident agent or agent for service of process. As the name of this section suggests, you should also place your IRS documents here. We will discuss these documents in more detail in the IRS section below. For now, just remember to put in this space your EIN documentation, any IRS forms requesting a change of tax election, proof of delivery cards or fax submittal sheets showing that you did submit the change forms, and any IRS confirmation letters you receive. As a convenience, you should also keep copies of other state, county and city documents here. These documents would include copies of your business license(s) and state tax registration. If you set up your entity in a state other than your state of residence, you may also have filed a foreign registration 4 in your home state. This documentation should be placed in this section as well. Rather than deface any of the documents we talked about, place them in individual plastic page protectors to put into your binder. The page protectors will keep the documents clean and undamaged, making it easier to copy them for a bank or to fax them to a merchant services account provider later on. Agreement Corporations have bylaws. Limited liability companies have operating agreements. Limited partnerships have limited partnership agreements. These agreements contain the rules by which the owners and managers agree to run the company. Acceptance of the company agreement usually takes the form of resolutions passed in the First Meeting of Members of an LLC or the First Meeting of the Board of Directors and the First Meeting of Shareholders of a Corporation. If the 4 A foreign registration is a formal request to a new state to allow an entity filed in another state to do business in the new state. Once the appropriate documents are filed, the entity will be known in the new state as a foreign entity. In the old state it will be known as a domestic entity.

13 Start Your Company Paperwork 13 partners in a limited partnership hold an organizing meeting, the agreement should be accepted there. Since an operating agreement is actually a contract, you may have to have both the Members and the Managers sign in the appropriate places at the end of the document. The bylaws of a corporation may be signed by the incorporator or the secretary of the corporation. A limited partnership agreement may be signed by the general partner. Agreements generally have schedules or exhibits listing, among other things, information about the owners, including the percent of ownership interest or number of shares each holds and the contribution each owner made to the company in return for his or her interest. Both the agreement and all schedules or exhibits need to be kept in this section. If the original agreement is replaced in full at a later date, a copy of the new agreement can be placed in this section as well. If you remove the prior agreement, make sure it is placed securely in your company files. This agreement governed the actions of the owners and managers up to the date when the new agreement became effective. If you did not receive an agreement from your incorporator, you should get one. Your incorporator or an attorney can provide one, or you can purchase one online. As with any legal document, review the agreement carefully to ensure that it reflects how you wish to run your organization. If you need to make changes, you can change the document before you vote to accept the agreement. If this is not practical, you can create the appropriate resolutions after the agreement is accepted to change the specific sections you do not agree with. If you are uncomfortable making these changes by yourself, contact your legal professional to help you. If you do not get and accept an agreement, your entity will be governed by the statutes of the state. You will be expected to know these statutes and to run your company accordingly. See Appendix B for an overview of the sections in an operating agreement that are particularly important to review. These sections will be similar to those in a set of bylaws.

14 Start Your Company Paperwork 14 81BMinutes This is the most active section of your minute book. It will contain copies of all meeting minutes for the company and all written consents of action without meeting, beginning with the organizer s resolutions, if any were prepared, and minutes of the organizing meeting held by the members of the LLC or the board of directors of the corporation. As outlined in Start Your Company Meetings and Minutes 5, you should document all decisions of legal, tax and financial significance in the form of resolutions. These resolutions will be recorded either in the form of minutes of the meetings you have held or in the form of written consents of action without meeting. As we said earlier, failure to record your decisions and to have them approved at the appropriate level of management or ownership can severely weaken your liability protection. This applies even if you are the only owner and manager of your entity. If you purchased a minute book, you may find templates for waivers of notice, meeting minutes and written consents in the book. If you do not have templates and have never created resolutions in the past, you may want to purchase Start Your Company Meetings and Minutes to teach you what to do and provide you with templates to create your own resolutions. Alternately, if you do not have time to learn how to handle this paperwork, you may wish to sign up for Minutes Service 6 and allow other professionals to produce this paperwork for you. Certificates Corporations have share certificates. Many LLCs have certificates of ownership. Some Limited Partnerships have certificates of ownership as well. These certificates provide owners with evidence of their ownership in an entity. If you have invested directly in a corporation in the past and hold your own certificate, then you will be familiar with the look of a share certificate. 5 Start Your Company Meetings and Minutes is one module in the Foundation Series of the Start Your Business small business advisory program. For more information go to 6 To sign up for Minutes Service and have professionals create your resolutions for you, go to the Resources section of this workbook or go to and look under the Resources tab.

15 Start Your Company Paperwork 15 If you have certificates in your minute book, you should also have a certificate register or stock ledger where you can record information when you issue a certificate. Each time you issue a certificate to an owner, you will record the certificate number the name and address of the owner the date the certificate is issued the number of shares or units the certificate represents the amount of money or the value of services or assets contributed in exchange for ownership whether this is a transfer from an owner to someone else or an original issue When you issue a certificate, enter the appropriate information on the face of the certificate and deliver it to the owner. If you are the owner of the entity, the certificate should be kept in the record book only if the book is kept in a safe place. Membership Roll or Shareholder List It is the responsibility of the secretary of the entity to make sure that an up-to-date list of all members or shareholders is kept in the record book. This list should include the name, mailing address and telephone number of the owners. Whenever you hold a meeting for your entity, you are required to give notice or waive notice of the meeting. To give notice or send out other information, such as financial summaries, it is important that you have a list of all owners and their up-to-date contact information. Miscellaneous Although this section is not necessary, it is good to have it as a place to keep company documents and information that do not fit easily into the other sections.

16 Start Your Company Paperwork 16 Company Seal The only entity that requires a company seal is a corporation; however, if you purchase a minute book for an LLC or limited partnership, you will probably receive a company seal as well. Seals used to be used to differentiate a deed done by the corporation from a deed done by its agents; that is, by the directors and officers. Today, the company seal is used mainly to authenticate the share certificates or certificates of ownership. The presence of the company seal on a document says the document was issued officially by the corporation, LLC or limited partnership, so it is important to keep your seal in a safe place. IRS Forms When you set up an entity, you or your incorporation company, attorney or CPA should pull an EIN for the entity. Although this is not strictly required if you are a single member LLC with no employees, it is still a good idea. At some point you may want to change your tax election or hire an employee, and you will need the EIN then. Also, it is better to have your business bank account, company credit cards, and merchant services account opened using the company EIN rather than just your SSN. Something as simple as setting up overdraft protection on your company bank account can start to build a credit score for the company and you will want that credit score recorded against the EIN. Later, when the company has a track record of being successful, you may be able to remove your personal guarantee and SSN from company credit cards and have the company stand on its own credit. Most EINs are pulled online from the IRS website 7. If you are pulling your own EIN, you will need to answer several questions online before the IRS issues your number. It is a good idea to print each page with your answers before 7 To pull your EIN, go to your browser and search on online EIN. You should see an entry for Apply for an Employer Identification Number (EIN) online. Before you select an entry, check to ensure it is coming from

17 Start Your Company Paperwork 17 moving on to the next page so you have a record of your responses. You should also print the contents of your PC screen with your EIN when it is issued. If you are the owner of the company or the designated tax matters member or officer, the IRS will create your confirmation letter immediately online. Print this letter as well and send a copy to your CPA. It is important that your CPA receive a copy of any document that might affect your tax situation. If your company s EIN will be pulled by your incorporation company, attorney or CPA, you will need to review and sign an IRS form SS4 and a release letter. This is required before any third party can pull an EIN on your behalf. When the EIN is pulled, you should receive either a printout of the page with your EIN on it or a copy of your SS4 with the EIN handwritten in the upper right hand corner. When a third party pulls your EIN you will receive your confirmation letter in the mail. Again, make sure you send a copy to your CPA. When your incorporator or CPA recommended an entity type, he or she should also have explained the tax election that entity should have. If no changes are made, a single member LLC will be taxed as a sole proprietor, a multi-member LLC will be taxed as a partnership, a corporation will be taxed as a C corporation and a limited partnership will be taxed as a partnership. However, an LLC can also be taxed under chapter C or under sub-chapter S of the tax code, like a corporation; and a corporation can be taxed under subchapter S of the tax code. A limited partnership has no options: it must be taxed as a partnership. To change a tax election, you must fill out and submit to the IRS the correct paperwork within the timeframe allowed. If your entity is new, you will have until two months and fifteen days following your file date to submit your form. If your entity is not new that is, you have filed at least one tax return for the entity then you must submit your paperwork by March 15 th of the year in which you want to make the change.

18 Start Your Company Paperwork 18 To change the tax election from the default for an LLC to a C, you must complete and submit IRS form To change the tax election from a default for an LLC or a corporation to an S, you must complete and submit IRS form Note: Some states, such as New York and New Jersey, require that you also submit state forms to change your tax election. To prove that you submitted the forms in a timely fashion, it is important to save proof of successful submission in your minute book. Proof can be in the form of a fax submittal sheet marked successful or a return receipt from the post office if you mailed the form. If you missed the deadline for submission, but still need to change your tax election without waiting until the next year, speak to your CPA about submitting your request with an appropriate revenue procedure (rev proc) letter. You should receive a confirmation of your change of tax election within two months of submission. If you do not hear back from the IRS, call and ask whether or not the change has been made. Make sure you have your entity name, EIN, and proof of submission when you call. As with all tax documents, send a copy of the confirmation to your CPA. He or she will not be able to calculate and file your taxes using the new tax election without this proof of change from the IRS. You should also place all confirmations and copies of anything submitted to the IRS in the appropriate section of your minute book. If you change your principal office address in the future, you can notify the IRS of this change using IRS form State Tax ID A state tax id may be required for a variety of reasons: to pay state tax for a C corporation if the state uses its own tax id instead of the EIN as the primary identifier 8 To find the latest forms online, go to your browser and search on IRS Form (form number) or go to and search on the form number.

19 Start Your Company Paperwork 19 to remit payroll taxes if you have anyone taking a W2 paycheck to remit sales and use tax if you sell physical products or incorporate them into a service you provide Most states have information online to help new business owners navigate through the tax department rules. If you have difficulty understanding what you need to do, consult your CPA or call your state tax department. State Filings Most states require that the managers or officers of an entity submit a report to the state once a year to update basic information. In some cases, like California, the first report must be filed shortly after the entity is formed; in other cases, like Florida, the state waits until a specified time the following year. This information usually includes the names and addresses of the current managers or officers and directors of the company. It may also include the current address of the principal office and the name and address of the current resident agent. The information required varies state to state and is often made public on the state corporations database. If the information is not available online, someone looking for the information can usually purchase a copy of submissions for a small fee. Often these reports can be filed online and the fee paid by credit card. As we said earlier, if you do file online, print out a copy of your submission and a receipt for the fee paid and place it in your minute book. In some states, such as California, you will also need to submit an additional report and fee to the Franchise Tax Board each year. Your CPA can provide the form for the submission or you can find the form online. Licenses Many states, such as Nevada, require businesses to purchase an annual business license. The same is often true for counties and cities. To learn which licenses you are required to have for your business, call your local Chamber of Commerce or search on your state and city or county on the

20 Start Your Company Paperwork 20 Fictitious Business Names internet. You can also consult the workbook for Start Your Company Compliance 9 to learn more about filing required paperwork. You may find that the rules are different for home versus offsite businesses. Either you may need an additional or different license or you may be exempt from needing a license at all if your home-based business does not generate enough income. In some states, such as Nevada, filing your annual report without having a state business license, unless you are exempt, is a felony. Your business license(s) should hang in the principal office of the company in the state or city the license is for. When you file your articles or certificate with the state to create your entity, the name of the company is then registered as a valid, legal name in that state. You can do business under the legal name of the entity in that state without filing a fictitious business name or doing business as (dba) registration with the state or county. Bear in mind that entities are filed with the state only. Someone in a different state may have created an entity with the same name as your company. If this is the case, and you wish to do business in that state, you will need to choose another name when you file your foreign registration and use that name when you advertise or do business in the foreign state. If you have set up an entity with a generic name, such as Hawkins Enterprises, LLC, or a name that fits a different purpose, such as Real Rentals, LLC, and you wish to market and do business under another name - for example, The Best Jeans Anywhere - you can either rename your entity or file a fictitious business name with the county or state. 9 Start Your Company Compliance is a module in the Foundation Series of the Start Your Business small business advisory program. For more information go to

21 Start Your Company Paperwork 21 Foreign Registrations If you are starting up a business in an entity you already have with the intention of moving the business to its own LLC or corporation when it proves successful, you do not want to rename the entity. Instead, you can file a fictitious business name to register your marketing name for the new business. Later, when you move your business into its own LLC or corporation, you will be able to use your fictitious business name as the name for the new entity if it has not already been taken. In some states, dbas are filed with the county where the principal office of the business is located. In other states, you can file a dba that is state-wide. If you are repurposing an existing entity and the current name does not fit what you want to do, you may wish to file an amendment to your articles to change the name of your entity permanently. Your incorporation company, attorney or CPA can help you. Remember to create the right resolutions before you file the amendment and put the resolutions into your minute book. Whenever you have a business presence in a state outside the state where your entity was filed, you need to file a foreign registration. A foreign registration asks for permission to do business in the foreign state even though your entity was set up somewhere else. A foreign registration is a legal filing, the same as the filing that set up your entity in the original state, and must be completed according to the rules of the foreign state. In some states you will find that the fees to file a foreign registration are higher than the fees to set up a domestic entity. What constitutes a business presence varies from state to state. Generally, just having a bank account or property in a state does not mean that you have a business presence there. However, renting out the property may constitute a business presence. Subcontracting someone to do work for you as an independent contractor does not necessarily mean you have a business presence in the state; however, hiring an employee who works from a home office does. That home office becomes an extension of your business. To determine whether or not you need to do a foreign registration for your business entity, research the statutes of that state or contact your CPA or business attorney.

22 Start Your Company Paperwork 22 Miscellaneous Now that you have a good start on your company paperwork, there are a few things you need to take care of at the same time. First, contact your insurance agent to discuss insurance for your business, even if it is in a home office. Most insurance companies will require you to purchase business liability insurance and fire and theft insurance specifically for your business office and assets. For more information, see Start Your Insurance. 10 Next, if you are hiring independent contractors or employees, create an employment contract. The contract will specify exactly what you and the independent contractor or the employee agree to. Make sure that your contract has strong non-disclosure, non-complete and confidentiality sections. Also, if you are contracting with an independent contractor, make sure that you specify that the contractor is not an employee and is responsible for paying his or her own taxes. When dealing with independent contractors it is best to hire their company rather than them personally. If you are doing business with an individual or another company, even one you own, create a contract. This contract should specify, among other things, what services your company will provide, what it will not provide, the client s and your responsibilities, payment schedule, process for resolution of issues, contract term, and the state law governing the contract. Contracts are often left for months after a business begins, exposing the owner unnecessarily to liability and performance issues with outside clients, and to issues with the IRS in the event they are audited. If you need help with any of your contract needs, talk to your attorney, look in the Resources section of this workbook or look at the Resources section on 10 Start Your Insurance is a module in the Foundation Series of the Start Your Business small business advisory program. For more information, go to

23 B21 Start Your Company Paperwork 23 Next Steps Congratulations. You have completed the first module in the Foundation Series of the Start Your Business small business advisory program. The second module is Start Your Company Meetings and Minutes 11. In this module you will hear again about the importance of documenting your tax, financial and legal decisions in a format that shows you are behaving as a responsible manager, director or officer of your company, separate from your role as an owner. The workbook gives you checklists and templates for creating your own resolutions quickly and easily. And you will receive the templates in electronic format, making it even easier to get started. We ll see you over in module two. 11 To learn more about Start Your Company Meetings and Minutes, go to

24 Start Your Company Paperwork 24 Resources for Start Your Company Paperwork 91BYour First Entity Solution When you are creating the paperwork for your new business, you can get a head start by leveraging these resources. Learn more about entities. Is your business giving you all the protection and tax benefits you deserve? Discover how to align your entity structure with your goals and empower your future today! With Your First Entity Solution you learn how to lower your taxes, protect your assets, and grow your wealth faster all without having to work any longer or harder! In this program, you ll discover: The seven most important things an entity can do to help and protect you Tools that help you uncover which protections and benefits are most important to you A map that shows which entities provide the features you want The pros and cons of each entity type, so you can choose the right one for your situation What to consider when filing for your entity The seven things you must do after filing to keep your entity strong and healthy How to use multiple entities to really accelerate your progress! With this complete home study system, you can:

25 Start Your Company Paperwork 25 Listen, learn, and enjoy four lively, story-packed audio sessions with Wendy Byford. Speed your progress with assessments, checklists, tips and other tools in the 104-page workbook. Your First Entity Solution is the only resource available today that summarizes the business entity structuring options available to you. Far more than a reference, it guides you to the solution most likely to work best for you. It s your shortcut to success when structuring your new business. To purchase, go to HUwww.eBiz-Learning.comU 12BPaperwork Resources Minutes Service Just A Minute, LLC Hwww.justaminutellc.com Hinfo@justaminutellc.com (480) (referral code ebiz) Contracts Patricia Sorensen, Esq phowe3581@aol.com (714) BTo Learn More about the next step in building your new business, visit: ebiz-learning HUwww.eBiz-Learning.comU about Entity Structuring and filing, visit: The Your Entity Solution, LLC web site HUwww.YesBusinessSolutions.com U(702)

26 Start Your Company Paperwork 26 Appendix A Example of minute book Summary Sheet HAWKINS INVESTMENTS, LLC LIMITED LIABILITY COMPANY DATA SHEET as at August 5, 2009 Date of Organization: May 31, 2007 Date of Amendment July 31, 2009 State of Organization: Nevada EIN: Principal Place of Business: 6628 Sky Pointe Drive, Suite 129, Las Vegas, Nevada Managers: Jack Smith Operating Manager Sarah Jones Manager and Secretary Celia Day Manager and Treasurer Fiscal Year End Annual Meeting Date: December 31 st First Monday in April Members Number of Units Jack Smith 2500 Sarah Jones 2500 Celia Day 3000 Thomas West 2000

27 Start Your Company Paperwork 27 Appendix B Overview of an Operating Agreement As we stated above, corporations have bylaws, limited liability companies have operating agreements and limited partnerships have limited partnership agreements. Each of these agreements contains the rules by which you agree you will run your company. If you fail to follow the rules stated in your agreement, you make it easier for a court to find that your entity is just an extension of you personally, and that you are really conducting your business the way an unincorporated sole proprietor or general partner would. This determination would seriously damage the liability protection your corporation or LLC gives you. So if your agreement does not mirror the way you want to run your business, you need to change the agreement before it is accepted or through resolutions after it is accepted, and not simply ignore what you do not like. The following is a brief overview of what you should look for in your operating agreement. You should find similar sections in your bylaws or limited partnership agreement. The first section of your agreement usually is the organizing section. It will contain the name of the company, state of organization, the effective date of the agreement, the principal place of business, resident agent information, the term of the company if it is not perpetual, and the business of the company. The name of the company will be the name you filed with the state, including the correct ending; e.g. LLC or L.L.C. The effective date can be any date between the entity file date and the date the agreement is signed; however, you will want the date to be no later than the date you start business. We typically choose the file date as the effective date of the agreement. The business purpose should be general enough that you do not have to amend the operating agreement if you decide to expand what you are doing. Most articles of organization state that the business purpose is anything that is lawful in the state. Your operating agreement may follow that wording. The next section to look for is the members section. This section should outline the duties of the members, particularly if the LLC is membermanaged. It should also include any decisions that require a vote of the members.

28 Start Your Company Paperwork 28 At the end of the agreement you will find schedules or exhibits that outline information about each member, including each member s name, address, percent ownership in the LLC and the contribution made in the form of cash, services or property in return for this ownership. To value services or property correctly, you should speak with your CPA. If your LLC is manager-managed, there should be a managers section as well. This section should outline how many managers the company will have, what their qualifications are for example, do managers also need to be members - and what their term will be. It should also cover what happens if a manager resigns, is removed or needs to be replaced; whether or not the manager is to be paid; what the manager s rights and duties are; and most importantly, what the manager s limitations are. You probably will not care if the manager purchases office supplies without approval, but what about spending thousands of dollars on computer equipment? The manager s section should also cover conflict of interest issues. For example, can the manager own a competing or complimentary business? If he does, can he sign up your clients into his business; and if he does, does he need to pay your business a marketing fee? Can he even run his own business if he is acting as the manager of yours? The answers to these questions need to be specified in this section. Somewhere in your agreement you should see clauses covering limitation of liability and indemnification of the members and managers. Corporations and LLCs give their owners liability protection. Members of an LLC cannot be held liable for the debts and obligations of the company unless those debts and obligations were personally guaranteed by the members. You should extend this protection explicitly to the managers as well through the operating agreement. You should also state how the members and managers will be indemnified; who specifically receives this protection and under what circumstances for example, did the action they are being sued over have to be legal and in the best interest of the company; what happens if a manager or member leaves in the middle of a lawsuit; and how a defense will be funded. Usually defense of a lawsuit against the managers is funded through Directors and Officers (D & O) insurance. Defense of a lawsuit brought by a client against the managers and employees is generally funded through professional liability or Errors and Omissions (E & O) insurance. One of the sections in your operating agreement should cover meetings. Look to see if annual meetings are required, and if so, when. There should also be instructions on how to call a special meeting if one is required. You should see rules on when and to whom notice of a meeting must be sent and when you can use a waiver of notice. Most small business owners use waivers, so make sure you understand how to use them.

29 Start Your Company Paperwork 29 It is important to find out what media can be used in a valid company meeting. Few meetings are held face to face, so look to see if you can use teleconferencing, video conferencing, and webinars. If you cannot, you may want to create a resolution to amend your operating agreement to make these media acceptable. Also check to ensure that Written Consents of Action without Meeting can be used to document and approve decisions in lieu of holding meetings of members and managers. In small businesses, this tool is particularly useful. There will be a variety of sections that outline how money is to be handled. Look for the terms for contributions initial and additional. Look to see if the manager can make a call for additional capital, and what happens if you do not contribute. Also review the sections on loans to and from the company. See who decides when distributions will be made, and how the affairs of the company will be wound down. Before you leave your review of the operating agreement, make sure you pay particular attention to the big five death, divorce, disability, bankruptcy and withdrawal. How each of these five is handled can make life smoother or more difficult in future if you have partners in your LLC. As an example, in the case of death of a member, you may not have the funds at that point to buy out the member s interest in the company; however, you probably will not want the member s heirs exercising voting and management rights. Your operating agreement can specify that in the event a member dies, the member s interest is converted to an economic interest only. If a member decides to divorce her spouse, that spouse might claim half of the member s interest in the LLC and demand to be admitted as a fully functioning member. Your operating agreement might specify that in the event a member goes through a divorce, the company will have the right, not the obligation, to buy out the member s interest at a specific price and on specific terms that include payment of time. If the LLC is set up to do business long term, it is possible that a member might become disabled during that time. Since the member might not be able to exercise his voting and management rights, the operating agreement could specify that the member s interest be converted to an economic interest only. The statutes governing an LLC are state laws. Bankruptcy laws are federal. While it may not seem that what a bankruptcy trustee can do is really legal, it may be perfectly legal under federal law. If you do not want to become partners with a bankruptcy trustee in the event a member declares bankruptcy, ensure that your operating agreement has a section that gives

30 Start Your Company Paperwork 30 the company the right, not the obligation to buy out the member s interest at a reasonable price and on specific terms. If the price is not reasonable, the trustee may have the sale set aside. Withdrawal sections can be long and complicated since they must cover voluntary withdrawal, including transfer and sale, and involuntary transfer. Make sure that your operating agreement does a good job of handling situations such as A member receives an offer for her interest in the company at a price far above what the company would pay A member does not have a third party offer but needs to get out. Can she force the company to buy her out? If so, at what price? A member wants to transfer his interest to his family members, including under-age children A member is being sued and his interest in the LLC is an asset Be specific about what is and is not acceptable, including the purchase price and terms for a sale. If a member wants to withdraw unexpectedly from an investment LLC, you might want to discount their share owing to the inconvenience of having to come up with money before the investment pays off. When figuring out what to do for each of the big five, make sure that everyone is involved in the conversation and agrees to the final decisions. Lastly, make sure that your operating agreement has specific wording to address the securities laws. Units of ownership in an LLC, just like shares in a corporation, are securities and fall under both federal and state securities laws. Good luck with your review; and remember change what you do not like. Do not simply ignore it.