Many small business owners choose to form a Limited Liability Company (LLC) for their business because an LLC protects the owner(s) from potential lawsuits and offers flexibility on tax filings. Some business owners may DIY it and thought they are all set. However, they may not be able to identify issues that will cause them trouble in the future.
Form an LLC in Delaware; Foreign Qualification
Delaware is the first choice for startup founders because they have heard so many good things about Delaware, and thought they should form their own company in Delaware as well. It is true that Delaware has a good reputation for being corporate-friendly, but it doesn't mean that forming the company in Delaware is the best choice. The ultimate question is, do you want to be funded by investors in the future or have an exit plan, such as being acquired by some other companies? If that is not your goal, then probably you don't need to form your company in Delaware. Also, for most lifestyle businesses, forming their company in their own state is actually their go-to plan. If your business is not conducted in Delaware, you may need to file a foreign qualification form with the Secretary of State (SOS) of the state where you are actually doing business. What is considered doing business? for example, in California, you are considered doing business if you are "entering into repeated and successive transactions of its business in [the] state, other than interstate or foreign commerce." This includes opening a bank account in your own state, holding meetings in your own state, operating the business in your own state, etc. It is usually hard to not be qualified as doing business in California as long as you are living in California and your principal place of business is in California. Thus when you formed your company in Delaware, you will still need to file a foreign qualification form with the SOS of your state before you can conduct business there.
Business Address v. Registered Agent's Address
Business address and Registered Agent's address could be the same but not necessarily. Business Address could be your office address or your home address (if you don't have an office), and it could also be a virtual address if you are concerned about your privacy. In California, the business address doesn't have to be where the company performs the business activities. As long as it is a physical address, not a P.O. Box, it is fine with the SOS. A Registered Agent is a designated party that accepts service of process and other official mails on behalf of the company. It could be an individual or an entity. Such party shall always be available during normal business hours. If you want to be the agent yourself, you need to make yourself always be available for this purpose. If you are unable to do that, you may want to hire a professional agent to perform this duty for the company.
If you hire a professional Registered Agent, you may not use their address as your business address. Although different agents have different policies on this, it is usually a bad practice to mix these two addresses together.
Member-manager v. Manager-managed
A member-managed LLC is run by all members while a manager-managed LLC is run by a manager or a few managers, depends on how the operating agreement states. The manager could be one of the members but could also be an outside manager that has no ownership of the company at all. Based on the employee/independent contractor test provided by state law, the company may hire the manager as an employee or an independent contractor.
Foreign Owner and Visa Concerns
An LLC can also be owned by a foreign person, entirely or partially. However, this is not a simple question because it really depends on what kind of visa the foreign owner holds and what role the foreign owner plays. Usually, the green card holder can work in the US without further restrictions, but an H-1B worker who is sponsored by a company and works full time will have trouble if they are involved in the management of another company, such as working for the company as an employee or managing the day-to-day operation of the company. Once USCIS finds out about this, their H-1B visa and future visa applications will be seriously affected. The best way to solve this problem is to have a US citizen or green card holder as the manager of the company.
Operating Agreement
Operating Agreement is simpler when there is only one member in the company, but it is usually more complicated when there are multiple members in the company. Sometimes the company issues different classes of membership interest to its members, and that will definitely require the operating agreement to be more detailed and complete. If your company has a unique situation, probably it is not a good idea to download some free samples online and DIY yourself, as such an agreement will have a legal effect on all the members and the managers, and a sloppy agreement will cause a lot of pain in the future.
There are some other details to pay attention to when forming an LLC. If the company has incurred costs and expenses, keep it on record, and separate the company's books and records, business accounts, assets, and liabilities from those of the members. If one member contributes his/her/its intellectual property (IP) to the company as a capital contribution, make sure such IP is assigned to the company and related agreements are signed and documented. There are tax issues to consider too, so it is necessary to talk to a tax professional to understand your tax responsibility and your company's tax responsibility.
Starting an LLC seems easy, but the devil is in the details. There are many things that a non-professional is not aware of or not sure about. Talking to a professional will not only help you make an informed decision, but also serves the best interest of your company.