What to Consider Before You Form a Missouri LLC
Starting your Missouri LLC (limited liability company) involves more than selecting a name. Before you form your Missouri LLC, you need to decide, among many other things, (i) who will own it, (ii) who will run it, (iii) who can bind the LLC in agreements, (iv) how to fund the LLC, and (v) what happens if you or a partner becomes incapacitated. There are many other things to consider when you form an LLC, but answering these five questions before you form an LLC will reduce the risk of problems developing once you’re up and running.
One: Who Will Own the Missouri LLC
If you’re going into business by yourself, then who will own the Missouri LLC is obviously is not a question you need to answer. However, if you are going into business with other partners, then before you form the LLC, you need to figure out who will own the LLC and in what proportion. The answer to this question may not be as easy as it seems at first blush. You first need to discuss with your partners what each partner will contribute to the business. Some of you might contribute the startup cash, some might contribute real estate or personal property, like equipment, to the business, while others might contribute expertise and know-how. Placing a value on each of these different forms of startup contributions can be tricky, but you need to nail them down before you form an LLC, as these values will likely determine the percentage of ownership each of you will start with when you form an LLC.
Two: Who Will Manage the Missouri LLC
While the owners of small companies also often manage the company, this is not always the case. Before you form a Missouri LLC, you should discuss with your partners who will manage the company’s day to day affairs. If more than one of you will manage the daily operation of the company, then you’ll need to discuss who will have the authority to make decisions about the direction and operation of the company and the scope of that authority. One possible structure is to assign specific decision making responsibilities based on each partner’s area of expertise. If, for example, a home builder and an accountant form an LLC to flip residential property, then the home builder is likely best
equipped to make decisions, up to a certain dollar amount, about hiring vendors and which supplies to purchase, while the accountant is best situated to manage the books and make financial decisions about the company. On the other hand, the LLC might hire a person, or another company, to manage the day to day affairs of the LLC and compensate the manager with a salary or fee rather than an ownership interest in the LLC. Thinking through and discussing the details of the management of the LLC will get your company off on the right foot and minimize potential disputes among the owners of the LLC once it’s up and running.
Three: Who Can Enter Into Contracts
The answer to this question will largely be answered by carefully thinking about, and discussing, the issues related to who will manage the Missouri LLC. If you are forming the LLC with partners, you need to discuss who will have the authority to contractually bind the LLC. This includes both oral and written contracts. (Yes, you can enter into an enforceable contract on behalf of the LLC simply by orally promising to provide a benefit to someone else in exchange for their promised performance.) In the example of our real estate investing company, the home builder might have the authority to enter into contracts with other construction vendors, up to a certain dollar amount, while the accountant might have the authority to enter into all other contracts, up to a certain dollar amount, required to operate the business. You should also develop a communications structure or policy whereby each person with the authority to act on behalf of the LLC promptly informs all of the other owners and managers anytime that person so acts. The more precisely you can define the authority of each person to act on behalf of the LLC, before you form an LLC, the fewer disagreements you should have with your partners about entering into contracts on behalf of the LLC.
Four: How Will the Missouri LLC be Funded
Answering this question is perhaps more difficult when you’re starting a business with partners. If you have not decided, in detail, who will contribute what to the LLC during its startup phase, whether it is cash, property or expertise, then you need to nail this down before forming the LLC. Figuring out who will fund the LLC and with what should be easier if you first discuss the previous three points. Under funding your LLC at the outset can have dire legal and business consequences, so make sure you and your partners commit to the specific ways in which each of you will fund or benefit the LLC, and try to determine if each partner can deliver on that commitment.
Five: What if You or a Partner Becomes Incapacitated
Finally, whether you will be the sole owner of the Missouri LLC or you’ll partner with others, before you form a Missouri LLC you need to think about how the LLC will be managed if you or a partner becomes incapacitated or dies. If you are the sole owner, try to identify someone you trust with your business affairs, such as your spouse, your child or a friend, and discuss with them whether they would be willing to run your company, at least for a limited
period of time, in the event you cannot. (In addition to granting this right to them in the operating agreement of your LLC, consider providing to this person a durable power of attorney so that their authority to act on behalf of the LLC is more certain. Banks, for example, will probably not allow your appointee to sign checks or withdraw money from the LLC’s bank account. A DPOA will confer greater authority, although many banks still hesitate to allow such person to make any account transactions. Consider adding a trusted person, such as a relative or close friend, as a signor on the account.)
If you will form a Missouri LLC with partners, then perhaps the other partners can simply continue to run the business in your absence. As an alternative, you and your partners might agree that the LLC will be dissolved if any partner becomes incapacitated for a certain amount of time, or that the other partners have the right to purchase the membership interest of the incapacitated partner or form the heirs of a deceased partner. (Consider having the LLC purchase life insurance policies on the lives of the members. The death benefit can be used by the LLC to redeem the membership interest from the heirs of the deceased member.) Regardless of whether the LLC will continue to operate if you or a partner is incapacitated, you must think about what will happen to your ownership interest in the LLC if you become permanently incapacitated or die – which is an estate planning topic for another article.
The information provided in this article is for general purposes only and is not intended as legal advice. Your circumstances may be unique, and you should therefore consult an attorney for advice regarding any of the issues discussed in this article.
Michael Sewell, MBA, JD, is the principal owner of Sewell Law, LC, d/b/a Sewell Law, which provides affordable legal services to small business owners.
