Some of my coworkers and I are kicking around the idea of forming our own LLC. This would be a new experience for me. I've always been an employee in the past.

I don't even know where to start in evaluating whether or not we have a realistic plan or not. I'm hoping that someone here has gone through this process before, and can offer some lessons learned. Are there some common mistakes I should be aware of? Do you know of any good books or other resources we should be looking at?

There are already a few points that concern me:

1. Some of the proposed partners have owned small businesses in the past, but this would be the first partnership for all of us.

2. We are geographically dispersed. We would rarely see each other face to face.

3. Our current employer might make things difficult for us. We would like to be able to partner with them on some projects, but they may view us as traitors who have gone into competition with them.

4. None of has any sales experience. Getting work and negotiating contracts would be new to all of us.

But there are also some good points:

1. I know and trust the others. We have all worked together for 10 years or more. We've stuck together as a group through a number of job changes.

2. We already have a client lined up that should be able to keep us all busy and billable for at least the first year.

3. I know that I prefer a small company atmosphere to my current my current mega-employer.

 

If it's possible, without causing a conflict of interest, consider a part-time transition to your LLC. Or, work on the LLC nights and weekends for the first couple of months, or even have each partner stagger their exits from their corporate jobs. It makes that scary jump a little less so.

GOOD LUCK!

 

It would be an LLP, not an LLC because you have more than one person involved.

I've set up both. Are you really in Singapore. I haven't done it there!

Can you reveal the industry you're in? That would help a lot with understanding.

I'd be initially concerned with the lack of sales experience. There are two things necessary - bringing in the business and processing it. You could be the best processors in the world and without the sales, you're dead. That's why salespeople always get the serious pay and the back office people don't.

 

No, no, no - burn the ships like Cortez. Scary as hell, but everyone is focused. You won't starve to death - humans are wired to survive. Your survival skills will kick in and you'll grow way faster than being in a situation where everyone is thinking "Well, if this doesn't work out I can always..." Design a situation where everyone is far removed from the normal options.

 

Cortez--the sea at your back and natives coming at you through the jungle. Now THAT'S motivation!

 

You can see how much I know about it.

Singapore is temporary. I'm here through the end of the year, then it's back to SoCal. Unless I quit first.

But this is another thing I need to consider. In exchange for being posted in Singapore my current employer will have their accountants do my taxes for this year, and will make me whole if I end up owing more than if I'd been in SoCal the entire time. But they will do this only if I'm still an employee at tax time next year.

IT security. We would be helping our clients customize, deploy and maintain security software. Our current employer develops such software. They have services people who do the type of work we want to do, but usually for relatively short periods. Longer projects are often farmed out to business partners. We'd like to be one of those business partners.

The part time transition wouldn't work. We would need to be on site with our clients during business hours. The staggered exits might be a good idea. It might help diffuse some of the tension at our current employer. If we were to all leave at once we would be instantly cutting our department's headcount by half. I would feel guilty doing that to my boss. He's been very good to me for a lot of years.

 

Not necessarily. You can have a multiple member LLC. It just depends on the structure that you want. An LLC is a Limited Liability Company, an LLP is a Limited Liability Partnership.

The LLC is a fairly new form of business structure. It is more or less a hybrid in that it operates much like a partnership but carries the limited liability protection of a corporation. The owners of an LLC are referred to as "members". Registration is done at the state level, and you will have to decide upon a state to register your LLC in. Once registered, the LLC can elect to be taxed as a partnership at the federal level. Typically, a single member LLC records its activities on the Schedule C of the individual taxpayers 1040 return. An LLC with two or more members files a form 1065. Form 1065, the US return of partnerships is informational, and no tax is paid with it on the federal level. Profit and loss flows through to the individual member (in a similar fashion to a partnership or an S corporation). The LLC has become a very popular form of business.

The very first thing that you should do is to consult with and hire a good CPA. Not only to determine the form of business that would best serve you, but to also help in setting up the controls and structure of your company. The CPA should be one that you can trust, feel comfortable with and is willing to take the time to offer advice as you form your company and grow. This will cost you money, but it is one of the best investments a new company can make. Get off to the right start. In the long run it makes things much easier.

 

Based on my experience, Rob hit it on the button. A CPA will also be able to advise on which state is best (in terms of favorable tax laws, etc) to set the LLC up in.

My wife and I had one in NM (and may start one in FL), for her massage therapy business and for selling my books, set up as an S-Corp. (One implication here is that the business activity can easily be quite heterogeneous.) The tax advantages for the two of us were huge (although with multiple members, this may be less easy to do).

But for sure invest in a CPA's advice. HPH

 

I'd recommend an attorney who specializes in tax law instead of a CPA when looking for someone to give advice about the structure of the organization. I have yet to find a CPA who can provide info about both the legal implications of a certain structure as well as the tax ones. (Legally they can't give legal advice).

Such details aren't nearly as important as the decisions you guys need to make regarding why you're doing it, who will do what, and what it will take to succeed. You probably want to be very comfortable with those issues before you even consider figuring out how to set it up from a legal and tax perspective.

 

Rob (ralper) is right on target.

It is important to recognize that LLC's are 'state' entities, as he has noted. 'S' corporations are Federal entities. LLC's are new enough that there isn't a huge book of case law on them. If your venture expects to do business in more than one state, you should know that the rules for forming an LLC can be different from state to state, and there are questions as to whether an LLC organized 'here' can/will be recognized 'there'. An 'S' Corp. is recognized in all states.

You should also recognize that any member of an LLC can act on behalf of the entire entity.... which could easily present problems, especially if you are geographically dispersed. It means that regardless of equity involvement, there are no "minority interests". If someone wants to go lease a car.... or buy some office furniture/equipment.... they don't need any other members to OK it. Everyone may be very friendly today.... that is no guarantee for tomorrow. And... if you lose someone, you have to be prepared to deal with whatever unknown comes from their estate.

I'd be concerned with the "geographic dispersion", and not seeing one another "face to face".

If your venture is in the same field as your present employer, you don't have to question whether or not your employer will see you as 'traitors' who have become competition. Especially if you are taking any of their clients with you. They will. You can expect them to make life as difficult as they can for you.

You may have a client that will see you through the startup and the initial year, but the lack of sales experience is a HUGE impediment to your future success. Not one that cannot be overcome, but it will be your biggest challenge.

You certainly do want to talk it over with a tax attorney.

All that being said...... if you decide to do it (be it as a true partnership, an LLC/LLP, or 'S' Corp), damn the torpedoes and full speed ahead. Don't look back.

My 2