15 Oct My First Company – FAQs for Solopreneurship
As a boutique law firm, we are fortunate and grateful to be a go-to resource for so many people who seek to start a company and want “to do it right” (their words, not mine). In fact, I’m not sure there is a part of my job that brings me more joy than genuinely helping someone get off the ground with a new venture.
This post is meant to be a further resource – answering frequently asked questions – for those people who seek to start their own company, or have recently done so and want to make sure they are doing it right.
First the FAQs (these are all actual questions from real clients who want to start a company):
Does it make sense to secure liability insurance now – or do this once revenue has been generated/proved concept? And, isn’t the whole point of the LLC to protect my personal assets? Why would I need insurance at all?
General liability (GL) insurance is usually a must for all businesses. Like all things, there are exceptions, but I always recommend that someone looking to start a company seek out an honest insurance agent and have a conversation about what it would cost and what it would cover. And get 2 or 3 quotes to compare both the quotes themselves but also the agent. You want a person who you’ll actually want to talk to, when you need to reach out. I generally do not recommend using a website or some other automated insurance buying tool – you will rarely get the correct coverage for your business.
Your lawyer will be helpful in identifying the potential risks that your business inherently encounters (most of which you probably have already thought of). One general rule of thumb is that if you have a physical location, or travel to meet clients to perform a service for them, then you should be protected by GL insurance.
Another type of insurance is called professional liability or errors and omissions insurance (E & O), and this is for service providers, largely. For example, lawyers and doctors have an E&O policy that is called malpractice insurance. If you provide a service to clients, such as marketing/branding, web development, or consulting, then you need to have the conversation about E&O as well.
This question also gets at timing: when to get insurance? I recommend that you get insurance just before providing your first services, selling your first product, or opening your shop. Insurance is there to protect you when risks turn into reality. If you are putting yourself out there, you have risk, and thus insurance should come with it.
Finally, this client brings up an important point about the nature of an LLC. They are correct that it protects your personal assets, but only after everything else in the company is gone! Think of the LLC as an inexpensive catastrophic insurance policy (which doesn’t always cover everything). You definitely will want to insure yourself beyond a catastrophe.
What is the annual cost to remain Company’s Registered agent?
We can’t speak for other firms, but we (Opticliff Law) charge $150 per year, and there is an $85 per year filing fee in Maine. Our service includes the following:
- We are the primary contact for your company, according to the State of Maine’s public database (shielding your name and home address from public consumption).
- We receive service of process on your company’s behalf, in the event the company is sued.
- We are responsible for the organization and safe-keeping of your company’s Company Record Book.
- We receive and discard junk and phishing mail that gets sent to all companies using the publicly available information.
- We, annually upon your request, provide a half hour conversation with you about your business.
- We prepare and file the company’s State-mandated annual report. We will contact you each Spring, starting the year after formation, requesting information and advance payment. Your failure to timely fulfill these requests will incur additional filing fees for the company, and could cause the company to fall into bad standing.
What do we have to do each year (to keep the company active)?
The company must submit an annual report to each state in which it is registered, but if you’ve hired a registered agent, this is generally taken care of for you, provided you have paid them and provided the information they need to file the report. Other than that, while corporations are required to produce annual meeting minutes of the board of directors or shareholders, an LLC is not required to take any action on an annual basis, but I do recommend to all companies that each year they review the year and the actions they’ve taken, and milestones they’ve hit, and record them in their company’s record book. General best practice is to prepare company consents when the company makes big decisions that need to be authorized by the managing members. These will vary from case to case depending on your LLC Agreement, but it’s also good to simply do consents when you want a time stamp of when a certain action was taken, and what the details of the action were. General rule of thumb: if your business were a household, and it were a decision you’d ask your housemate about before you made the decision, you probably should do a consent.
When am I able to open a bank account and then meet with an accountant?
Meet with a CPA immediately! Starting a company means a more complicated tax picture, so I highly recommend finding a CPA you trust and actually like – you may be spending more time with them than you’d think.
You can open the bank account in the name of the company once the state recognizes the company’s existence, and you have an EIN for the company. Some banks also require an LLC Agreement or corporate docs, so make sue you check with your banker and get a list of all the items you’ll need to open the account. Or, you can open the bank account immediately under your personal name, and when the company is created, you can switch the name on the account over to your company name. In either case you will have to personally guarantee the account.
Also, some unsolicited advice: get a company credit card on Day 1. Not only does a credit help with day to day cash flow when you start a company, but you start to build credit for your company right out of the gate. I make almost all company purchases with the company card, and try to pay it off in full each month to build good credit for the company. Plus … points!
Say I want to hire someone – do I need my company documents revised?
No. Since the employee will not be an owner of the company, the formational documents will not be affected. I would urge you to find a payroll company that fits your company though, and they will guide you through all aspects of bringing on an employee, except for (1) the employment agreement (should you choose to have one), and (2) the employee handbook (should you choose to have one), which are documents regularly provided by your lawyer. A payroll company makes life so much easier for you as an owner, and helps you with compliance, reporting, and actually getting people paid.
And if I wanted to hire an outside consultant?
Hiring a consultant is just like hiring any other service provider. No change to your company’s docs, but you’ll want to make sure the contract between your company and the consultant is serving your needs. Depending on the type of service provider, you may have your lawyer look over the agreement. My general advice is, regardless of the type of person you seek to engage (photographer, web developer, another lawyer, consultant, etc.), to at least have a quick conversation with your lawyer about whether there needs to be a written contract and if so, what terms are customary or preferred to protect your interests. For example, if they are producing anything that could be considered a copyright, you need a written agreement to confer ownership of the copyright to your company.
If I wanted to change the name, would we need to revise all of these documents?
No. A name change requires a company consent to authorize the change, and the filing of the proper form with the state. You will not necessarily need to amend your LLC Agreement or Bylaws, but often owners like to do so to reflect the new name.
If I change what I am doing under the company name, would I need to revise these documents prior to doing so?
The answer to this depends on how and where your company’s purpose is worded in your organizing documents. If it’s specific to what you do, you will need to amend them accordingly. If it’s not, you don’t. In either event, a company consent is recommended.
The following is an exchange between a client who wants to start a company and myself over email. The first part of each question is a quote from my standard post LLC formation letter, then the client follows up with the client’s question.
1) CLIENT: “Never commingle personal and business expenses. The commingling of personal and business assets must be avoided. You should maintain a separate bank account for all company funds, and personal expenses should not be paid from the company account. You may receive from the Company reasonable distributions, reimbursement for legitimate business expenses, and repayment of loans.”
–Sorry, I am a novice. What does this exactly mean by “reasonable distributions”, etc. I am thinking that it means I can draw funds from the business on a certain time interval as long as this action doesn’t end up bankrupting the company?
ME: Exactly! When you start a company, you need to think of your company as a person separate from yourself, one that you are in charge of keeping alive and healthy, you don’t want to drain it of everything so it can’t afford to live. Make sure it can afford its monthly expenses, say 3-6 months worth. But excess funds are yours to withdraw or “distribute” to yourself.
CLIENT: If I do pay myself, do I need to do anything more than just note it on an accounting statement (do I need to write myself a receipt) or a W2 to myself?
ME: Nope. A note to your books as an “owner’s draw” is perfect.
2) “It is therefore a good practice to have a so-called “Unanimous Written Consent” signed by the Managers (or Members when appropriate) and filed in the company’s record book whenever the company takes on “significant transactions.” Examples of such action include the signing of leases, hiring of employees, major equipment purchases, the borrowing of funds (including promissory notes), establishment of employee benefit plans, membership issues, major changes in business operations, or other significant events. We would be happy to prepare the appropriate resolutions for you as needed.”
–For example, lets say I decide to hire a creative agency design a logo, etc… would I need to create a document listing unanimous written consent since, relative to the company’s size, it would be significant? If so, should I have you do that in addition to the contract template or is it something as simple as writing what I did on document and signing? Then for storage of this document (including contracts), would I store this with you, or just in my personal files- in other words, is your office to hold all contracts/items, or do I do that (but be able to reproduce them if necessary)?
ME: As your company’s registered agent we are in charge of your company record book. If the company takes actions and as its sole member you provide unanimous written consent, then yes sign the consent form, scan it in, and send it over to us, and we can add to your record book. You can also send a batch of them to us periodically. I wouldn’t get too crazy with the consents, and I’d use them for significant transactions. But yes, if you hire a consultant or contractor to create a logo for you, or take photos for you and you have them sign a contract, it could not hurt to memorialize that decision with a consent.
Of course there are lots of other questions that may arise, but these are many of the most common ones.
What questions do you have?