Starting a business is exciting. But it's also stressful. And top of that stress-inducing to do list is the legal mumbo jumbo. Or at least it should be.
When you start a business you need to form your entity to stay on the right side of the law. For most creatives, this task is overwhelming and might as well be encrypted in Chinese. Limited Liability Corporation what?!
This confusion is partly why we started Flea Style Summit -- to help people that think like us with all the gray area stuff.
To help out anybody in this boat -- or considering joining the small business journey -- we asked our go-to legal gal Amanda Montgomery with Culp & Dyer, LLP to share tips that are easy to digest and let you check this box off your list to move on to the fun stuff.
Amanda, you're an attorney who works with small businesses. We love that! Tell us a little about yourself.
Sure! My name is Amanda Montgomery, I’m an attorney at a boutique firm in Denton called Culp & Dyer, LLP. I represent clients with the firm’s partners, Marc Culp and Benjamen Dyer. I’ve been a licensed attorney for nine years and I split my practice between business litigation and corporate law. I’m fairly creative (as much as you can be in law practice), but my family is 100% creative souls and artists. My husband Joe runs the studio department at Weber Shandwick in Dallas and all three of my sisters are brilliant artists (one was a Flea Style vendor!). I’m hopeful that my two sons will be little artists; I’m really the only one who missed that boat! I’m inspired by the energy of entrepreneurs. I have real admiration for the bravery and vulnerability required to build your business from scratch and share your work with the world.
Why is it so important for new business owners to form a business entity, such as a limited liability company (LLC)?
I think there’s a misconception that if you're new or not quite generating a lot of revenue, that you don’t need to worry about it. It can be easy to ignore the filing paperwork and start signing contracts under your own name. That's not a great idea, though, when you consider that you’re signing a legal document in your own name. It’s always timely and worthwhile to try to insulate yourself from personal liability whether your business is your main source of income or still a side hustle. On top of that, having an entity like an LLC conveys to your potential clients and customers that you are serious, organized and a force to be reckoned with.
What are the advantages of forming an LLC?
We’ll focus on forming an LLC, but there are definitely other entities to consider such as corporations or limited liability partnerships (LLPs). A lawyer can advise you on which one best fits your business, but it will be your choice. Anyway, back to advantages of LLC! In Texas, if you don’t register your business, you will either be deemed a sole proprietorship (if you’re a solo flyer) or a general partnership (if you co-own the business). These designations give you zero liability protection and limited tax options. If you go the LLC route, you can be a single-member LLC or have multiple members. Overall, LLCs in Texas are given a lot of flexibility and they aren’t as formal in structure as corporations.
Why do they call it “limited liability,” are you more protected?
So once you’ve registered your LLC, it’s a separate and distinct legal entity from you. You will not be personally liable for the debts of the LLC unless you guarantee those debts personally. The same notion applies if one of your employees is accused of wrongdoing but you personally are not accused -- your LLC could be drawn into that lawsuit but you and your personal assets would have some protection. There are exceptions to this, but that’s another conversation for another day!
Does creating an LLC complicate your taxes?
This is where you need a stellar CPA. It’s an essential relationship for any business owner. Accountants are gifted at ensuring you are filing properly and they know what to file and when. Unless they are specialized in tax law, lawyers typically cannot (and do not) provide tax advice.
Is it expensive to file for an LLC?
If you’re filing on your own, you will just have to pay your state’s filing fees. The Secretary of State’s website for Texas can be helpful and it allows you to e-file. If you hire a lawyer, you will of course pay for their expertise and time, but the process may go faster and smoother. The process of registering your LLC can be intimidating at first, but it’s actually fairly simple once you’ve learned the terminology. As soon as your Certificate of Formation is filed, your LLC officially exists and you will be off and running!
Great info! So what are are the links exactly?
The main Texas Secretary of State site is www.sos.state.tx.us; for e-filing business docs you use SOS Direct: https://www.sos.state.tx.us/corp/sosda/index.shtml and the page with forms you can download is: https://www.sos.state.tx.us/corp/forms_boc.shtml.
Can you offer approximate costs for filing on your own versus using a lawyer?
If you file your own Certificate of Formation for your LLC, it will cost $300 in Texas (every state is different). If you use a lawyer and want a few extra things, like a name reservation first ($40) and a company agreement drafted as well, it will likely be over $1,000, which includes the filing fees. It really varies depending on what you need and how complex your LLC will be.
Is there anything else I need for an LLC?
As far as filing, in Texas you just need to file your Certificate of Formation and designate your Registered Agent (a must-have!). One thing you should have, but do not need to file in Texas, is a company agreement (also called an operating agreement). Your company agreement lays out the backbone of your business: the members’ rights, ownership percentages, financial responsibilities and what is necessary for the company to dissolve. If you ever consider buying real estate for your company, lenders often require this agreement. Attorneys can really be a resource with them, especially if your LLC has multiple members.
We learned the hard way -- a copycat business stealing our legally-drafted documents -- that it's important to have an attorney in the wings. Why should small businesses forge a relationship with a trusted attorney?
I’m biased of course, but I think it’s a great idea to build a strong relationship with an attorney! As your business develops and grows, a lot of documents will cross your desk including vendor contracts, leases, and product licenses. A skilled attorney created those confusing stacks of paper, and it’s so important to have someone on your side to decode and negotiate the terms for you. Aside from transactions, you also may hit obstacles with a government agency or with a competitor. Protecting your business is always going to be your top priority, and the wonderful thing about attorneys is that we feel the same way.
Any parting words for up-and-coming entrepreneurs and makers?
Do not let the complexities of the business world intimidate you or make you feel like you're not ready. You’re a doer, so I’m sure you have the ingenuity to figure out just about anything! Forming a business entity is a necessary step on your journey. If you need help, do not be afraid to ask for it! If you need legal help with formation or anything else, I would encourage researching attorneys and their practice areas to find your best fit. Definitely consider making a list of everything you want to talk about with the attorney. Like everyone else, attorneys are strapped for time; telling them what you need fast and effectively is helpful for everyone. You may be surprised by the inherent curiosity of attorneys you speak with, most of us look at issues posed to us like a puzzle and we want to solve just about every puzzle. If the attorney cannot help you, most will direct you to the right resource — that’s definitely a goal of mine.
Amanda Montgomery can be reached at the law firm Culp & Dyer, LLP by phone (940) 484-2236 and by email firstname.lastname@example.org. Culp & Dyer is located at 222 E. McKinney St., Suite 210, Denton, Texas 76201.