You are about to learn exactly what you need to do to set up your LLC correctly and maintain all the proper legal protections for your business and your personal assets.
Now, this is part of the first pillar of my LOCK it Down Protection System. This is incredibly important because so many online businesses get this part of the equation just flat wrong.
Here's what most of you do. You get your paperwork back from the state, you put it in a drawer, you close the drawer, you wipe your hands, and you say, “You know what? I got my LLC. I'm good to go.”
No, you're not good to go.
If that's all you do, you missed the whole point of forming an LLC to begin with. Because if all you do is set your paperwork aside and forget that it's there and keep going about your business as if nothing has ever changed, then you just basically wasted several hundred dollars setting up your LLC, and you're not going to have any protections in place in the event something goes wrong with your business.
You don't want to do that, do you?
Some of you might resonate with this. You might be like, “Yeah, that sounds like something that I just did. What do I need to do next?” Well, I'm about to tell you what you need to do next, so let's hop to it.
Set Up Your LLC Correctly by Getting an Operating Agreement
The very first thing you need to do is you need to go out and you need to find an operating agreement.
You can find them online, they might be good, they might bad, I don't really know, but you need to find an operating agreement. Here is a link to one that we sell on our online legal template store that you can get access to for 50% off.
Let me tell you, a lot of you are probably wondering, “Well, why is that important?”
Aside from what I just said about the fact that you got to do a bunch of stuff to keep your LLC protected, the reason it's important is that you need that operating agreement to show that you're actually operating as an LLC. If you don't have that operating agreement, then if something goes wrong with your LLC and you get sued, then you're going to default to the state rules, wherever you live.
Chances are, number one, you don't know what those rules are. Number two, you're probably not following them if you did know what they are. Number three, I'll throw a third one in there because, why not, chances are the rules aren't very favorable to what you are trying to do as a business anyway.
It's better to just have your own operating agreement that you can read through, change, edit as you see fit, and now you know exactly what rules you need to be following for your business. That's number one. You need to get that agreement in place.
Set Up Your LLC Correctly by Getting an EIN Number
Once you've got that operating agreement in place, we're going to go to step number two, and that is you need to go and get an EIN number.
You can go to the IRS website. It's pretty easy to do. It's going to take you five to 10 minutes. And it's free. You fill out some paperwork, some forms online, and you're going to get your EIN number.
The reason this is important is you're going to need it for the next step. But the one thing I will tell you about what you need to do once you get the sheet from the IRS or the letter from the IRS that shows you what your EIN number is, is make sure you save it.
Make sure you print it out maybe in triplicate, put it in three different places so you never lose it. Save it to your hard drive, save it in the cloud somewhere where you keep your business documents, put it in your business binder, whatever you need to do, because when the IRS sends this to you, that's the only correspondence you're ever going to get from the IRS that's going to show you what your EIN number is.
If you lose that, then you're probably going to need to call the IRS and wait on hold for several hours to figure out what that number is, and you don't want to do that. So, make sure you save that document. Don't just close the page, the web browser, and forget about it.
You need to save that document, write that number down, make sure you have it, because you need it for step number three, which is you need to go and open a business bank account.
Set Up Your LLC Correctly by Opening a Business Bank Account
Now, this is incredibly important because without a business bank account, you're just doing everything in your personal bank account.
By doing that, you're commingling business and personal funds.
That is a huge no-no in terms of if you were to ever get sued, because if you're commingling business and personal funds, if you're using your business account as your slush fund, then if a plaintiff comes in and sues you, they're basically going to say, “Look, there's no distinction here between the business and his personal stuff or her personal stuff, so there really is no LLC here. It might as well pierce the corporate veil.” That's exactly what is going to happen.
Now, the reason I listed this as step number three is because you're going to need that operating agreement, potentially you're going to need your articles of organization showing that you formed the LLC, and you're going to need that EIN number from the IRS, all to set up your business bank account.
Even with that, the bank may actually ask you to sign some additional documents saying that you have the authority to open a bank account on behalf of your business.
Set Up Your LLC Correctly by Updating Your Contracts
Once you've got your business bank account set up, then you move on to step number four. That is, you need to update your contracts.
Now, if you're just starting out, chances are, you don't have any contracts in place, in which case you probably to get some. You're like, “Well, Jim, that's great, but what contracts do I actually need to get?” Well, I'm glad you asked that.
If you are an offline business and you're working with one-to-one clients, you might need a one-to-one client agreement. You might need an independent contractor agreement for the people that you hire for your business. You might need an employee agreement for employees that you would hire for your business.
There's all sorts of contracts that you may need for your business, and you need to make sure you get some.
Now, if you're already in business and you're just setting up your LLC now, but you already operating and you've already got contracts in place, then what you need to do is you need to make sure that you update all your contracts to show that your LLC is the party to the contract and not you personally.
I feel like a broken record here. Do I sound like a broken record? I do? I sound a little bit like a broken record? Yeah. You need to make sure your contracts are updated. That is going to be the next step.
Now, again, we've got a template store, here is the link. If you need any of these type of contracts, we got them for you. We got you covered, so check that out.
Set Up Your LLC Correctly by Deciding Whether or Not to be Taxed as an S-Corporation
The next step, step number five, you need to decide whether or not you're going to need to elect to be taxed as an S corporation.
This is a nice benefit you have when you set up an LLC or a corporation is you can elect to be taxed as an S corporation.
Now, I don't typically recommend that you do this unless you have at least 25 to $50,000 in net profit for your business. Anything less than that, then the cost of operating that S corporation is not worth the tax savings that you get from having that S corporation.
But if you're over those thresholds in terms of net profit, that means revenue coming in, minus your expenses, not including owners pay, then having that S corporation is going to save you substantially when it comes to taxes.
I've done a bunch of other videos about that. I'm not going to go into that here. Suffice it to say, that that is something you need to be looking at.
The deadline for filing an S corp election for your newly formed LLC is going to be 75 days after you formed the LLC. Now, you can request late relief from the IRS if you formed your LLC way back at the beginning of this year, and you want the S Corp election to be effective for all of 2021.
For example, you can still file and request that late relief from the IRS. There is a procedure that you must follow to do it that way. Suffice it to say, it can be done. For most of you, it's that 75-day window.
Now, if you're saying, “Well, I'm not sure I want to do the S corp this year, but maybe next year,” that's fine too. The year will start over and you have 75 days from the beginning of the calendar year, so you'd have until March 15th of 2022 to make that election for 2022.
Set Up Your LLC Correctly by Signing Up for Payroll
The sixth step that you need to do after you formed your LLC is you need to sign up for payroll.
Now, this is really only going to be necessary if either, one, you have elected to be taxed as an S corp, in which case you're going to need to pay yourself a paycheck each month or once a year or once a quarter, however often you feel that you need to pay yourself a paycheck.
Then number two, if you have employees working for you and you need to pay them a paycheck, you definitely need to make sure you sign up with a payroll provider.
A lot of people say, “Well, Jim, can't I just hire a bookkeeper?”
Yeah, you could just hire a bookkeeper. Here's the thing. Even the best bookkeepers are human and make mistakes.
I know that if you go to the provider I recommend, I know that they're not going to mess it up for you. It's a company that I know and I love, and I'll do a video about them in probably another month or two, because I always do a video about them at the end of the year, but it's Gusto.
Check out the this link. You can sign up with them and I think you get a gift card from Amazon or something. I'm not sure what exactly the promotion is they're running right now, but they're always running some sort of promotion. Check them out. If you need a payroll provider, make sure you sign up for one, and you're good to go.
Those are some of the things you need to be thinking about if you want to make sure that you're protecting that corporate veil for your newly formed LLC.
But if you set up your LLC the wrong way to start with, then none of these things are going to matter, and this is all really just a pointless exercise.
That's why you need to check out this video I did right here that talks about the things that you need to do to make sure your LLC is set up the right way from the very beginning.