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  • Writer's pictureEvamaria Foltz

The Legal Side of Starting a Business with Business Attorney, Garrett Murphy. How to file a LLC


Garrett Murphy of Garrett Murphy Law, Business Attorney on Clever Entrepreneurship: Beyond the Boardroom, a business education podcast where we discuss what is an LLC? is and LLC important?
Garrett Murphy, Attorney at Garrett Murphy Law

Introduction:

You're listening to Clever Entrepreneurship Beyond the Boardroom, your source for practical, no-nonsense business advice from real business owners and professionals. I'm Laura Morris. And I'm Evamaria Foltz. And we're two professionals tired of flowery bullshit being presented as business advice from people who don't know what they're talking about. Together, we're on a mission to bring you real talk and real advice from expert guests who will provide educational steps to building business success.


No toxic positivity and no fluff. And if you sign up for our email list, which is linked in the description, we'll send you all of the actionable steps from this episode right to your inbox. So sit back, grab a notebook, and get ready to level up your business game with clever entrepreneurship beyond the boardroom.


Today we have our very first guest and we're very excited about it.

Today, we have Garrett Murphy. Why don't you go ahead and introduce yourself for us?


Sure. My name is Garrett Murphy. I am the owner and member manager of an LLC called Garrett Murphy Law LLC. It's a boutique law firm here in Evans, Georgia.

So can you explain to us what an LLC stands for and kind of what it means to have it LLC- What is it and how to file an LLC?



Sure.
So an LLC is a limited liability company. A limited liability company as its name and state is a type of company. Most people are familiar with corporations. Some non-profits and some charities. Limited liability companies were started in 1977, but the state of Georgia enacted laws in 1994 that allowed individuals to create limited liability companies in the state of Georgia.
What a limited liability company or LLC does is it's kind of a hybrid between your traditional corporation, general partnerships, and limited partnerships. It is a company that has a lot of flexibility, flexibility with the structure of the business, flexibility with how you manage the business- from meetings, membership distributions… So really the purpose of it is it's a hybrid entity that is built around flexibility.


A lot of times like in the business world, you see people asking their friends- like people who have no idea or maybe they started their own business and they're looked at as sort of a trustworthy source-

Do I need an LLC or should I do a sole proprietorship? And I've noticed people- we talked about this on our banter episode last week- where people will say, “Oh, well, this is what I did because, you know, an LLC, you need to make a certain amount of money for that to be something that you should do. So you should do sole proprietorship if you don't make over X amount”

So what is your view on that?

Sure, it's a great question. So an LLC or any company really provides three areas that an individual needs to focus on with regard to should establish a company or should maintain a sole proprietorship. Those three characteristics are corporate record keeping, how diligent, or how flexible it needs to be.


Taxation. Is it a SCorp? Is it a pass through like an LLC? Is it double taxed both at the corporate level or at the individual level, but also perhaps more importantly in to the question that you asked, is liability.
The name ‘LLC’ itself implies that there's limited liability. The nuts and bolts of an LLC, if it's done correctly, if it's managed correctly, is that the company maintains all of the liability and that it does not pass through to the individuals, to the owners. The members in a sole proprietorship, any liability automatically passes through to the members or to the to the individuals.

So what that means in a sole proprietorship, your house, boat, cars, bank accounts, your personal assets are in play in the event of a lawsuit or other things require you to come out of pocket with an entity, whether it be a limited liability company or a corporation. The purpose is to keep that liability with the company and separate it from the individual's personal assets.


So can you think of a reason why an S corp or a sole proprietorship would be preferable over an LLC?


So yes, from a tax standpoint, typically for a corporation, you're traditional S-corp C-corp; there's more flexibility in what to do with excess profits.
What does that mean? That means a company is the reason you create a company is because you have a vision, or you have a dream, or you have a product that you believe you can make money from.
With an LLC, typically, that money was what's called pass-through that money. The profits pass through to its members, to its owners, to their personal, to their personal income tax, to their personal taxation.
Certain levels you can get to to avoid that with a corporation, a corporate structure, you have some different strategies, tax strategies that you can take advantage of.
So that's just on the tax base. And we just spoke a little bit about the liability side as well.

And when somebody comes to a business lawyer, somebody who specializes in business law, they would discuss with you or with their legal representative like what the best option would be for them according to their if I'm understanding right, their tax situation and their preferences there and also how they want to separate their assets from their, you know, their personal assets and their business assets, right?


That's correct. That's absolutely right.
So the first thing I tell people that come in the door that are interested in either reorganizing their business, shaping up perhaps their entity that they already have through new documentation or revised documentation, or whether it's somebody coming in and saying, hey, will you just walk me through the multiple types of entities and what would be best for me. From a tax standpoint, I am not qualified to give tax advice.

So one of the most important things is to surround yourself with a team. You have a lawyer that can talk about the legal side of things. You also want to have an accountant or a CPA that can look at your tax situation and make that determination for you.

One of the things I see a lot with people who are starting a business, they're in their first year of business, they get really confused on the process of forming an LLC. They go online, they do a Google search, and there's a lot of things that pop up. There's some good information that's a bad information. There's people just trying to sell the the process of doing it for them. From your standpoint, in your professional standpoint, what is the best way of going about getting an LLC?


What are the websites they need to go to or should they hire somebody to kind of do it for them?


Right. Great question. You're right; There's a lot of- if you do a Google search- there's a lot of people that have set up an LLC for you, in particular here in the state of Georgia for X amount of dollars that may serve a certain portion of the population.
But what that does not provide is customized solutions.

A limited liability company is governed by both Georgia Law under Title 14, Chapter 11. It's simplistically called the limited liability Company Act, and then it's also regulated by the state of Georgia, the Secretary of State's office, their corporation division. Just to start an LLC, you need the first thing you need to do is submit to the Georgia Secretary of State's office via their online portal what's called Articles of Organization.
For an LLC it's called Articles of Organization.
For a Corporation, it's called Articles of Incorporation.
This asks for information such as who the registered agent will be, the principal office, address, the name of the company, and that information is all public record. You submit that with $100 again, it can be paid online, and the Georgia Secretary of State's corporation division will respond to you. And typically within a week, two weeks, and let you know whether it's been approved or if there's any additional information they may need Once the articles of organization are approved. Your LLC is effective, as far as the Georgia Secretary of State is concerned.
The next step is to figure out your operating agreement. I would argue that the operating agreement is the most important document within an LLC business.
It will discuss is what happens for contributions, distributions, if any meetings are supposed to be held, voting privileges, what happens in the event you want to sell some of your membership interest.
Perhaps most important, I would argue, is that the operating agreement allows for a buy-sell provision or a right of first refusal. In other words, what happens in the event one of the members dies?
One of the things we see a lot of operating agreements that don't have this type of information buy sell provisions, right of first refusal in the event one of the members dies, who gets it, who gets what right. And it depends on whether the member that passed away has a will or not. So the operating agreement can be, you know, a few pages if you get it from somewhere online, they can be up to 40, 50 pages.

But the operating agreement is essentially the policies and procedures, the backbone of how the company is going to operate. And I would argue that it needs to be very, very customized to the needs of the individual business and to the needs of the member.


Is this something that you would go to a lawyer for and that you would have to file online- or be able to establish online?



Excellent question. So an operating agreement is not a public document. In that operating agreement, you can find templates online. Although admittedly, and I say I'm biased here, I probably am to some degree; I do think you need to consult with an attorney because what you'll find online is- I've seen some pretty good operating agreements-, but they're typically very generic.
They don't know the ins and outs of the business. They don't know necessarily details of the individual members and the business.


And when you start kind of customizing it yourself, you kind of could get into some murky waters there where it might not cover you the same way that it should because you went through without any expertise and tried to do it yourself.




That's right. There's an old saying: "you don't know what you don't know."
In meetings with clients where we set up these LLC or other entities, there is a wealth of knowledge. These meetings can last anywhere from 2 to 3 hours, and most of the people that come in the office have never thought about this.
So we'll lead the meeting: I want you to think about these ten, 15, 20 things if it's a sole member, but if it's two or more members, let's talk about these things here. Some of them are hard conversations, some of them are easy conversations. But let's play the what-if scenarios out. And I think that's where the level of customer customization and where the legal expertise really comes in handy.


So you have the operating agreement. You'll also need to get a federal EIN.
Each entity should have its own tax ID number. It's very simple to do online. You submit the necessary information. I would argue it takes 5-10 minutes to do so. You file your articles of organization with the state, you get your operating agreement in place, you get your ID number


And can you clarify what EIN stands for?



It's your employee identification number.


So can you lay it out in terms of step one, step two, separate for forming an LLC or a sole proprietorship?



Absolutely. So a sole proprietorship, you really don't need to do anything. That is that, business just operates as is as the person. The liability and taxation flows to that person and sole proprietorship. If you needed to do branding or trademarking something like that, you go to the Georgia Secretary of State's Corporations Division for a limited liability company.
Step one: Get your articles of organization filed online through the Georgia Secretary of State's Corporation Division. Pay $100.
Step two: Get your operating agreement in place. Make sure those conversations are had.
Step three: is get your federal in employee identification number.
Step four is: look at local business licenses. Are you in an industry that requires you to have if you're a contractor, do you have your contractor's license? Do you have other necessary licenses? In Columbia County, you need a business license to operate.
Also, keep your CPA or your accountant involved every step of the way. I would actually consult with your accountant before setting up the entity. In that way, a lot of what we do is have conversations with CPAs around town for that very purpose. We have- we kind of, you know...
the client's like the quarterback, and then the CPA addresses what kind of, you know, is it an SCorp, is it an S-election? Then the lawyer talks about the operating agreement, the liability side.
So I would certainly start with meeting with your CPA and your lawyer first so they can begin the communication of what's best for you.


What are the key legal differences between an LLC and other business structures, such as an SCorp or sole proprietorship?



Yeah, so an LLC, you remember if I said earlier, it provides a lot more flexibility.
SCorp needs corporate records. They need to be very diligent and to be written. They need to be stored. To many people, that can be cumbersome.
The LLC doesn't have those strict corporate requirements that your traditional company does. But that being said, I would always say if there is a meeting, always make sure that everything's written down, even call special meetings if necessary.
It's always good to have very solid and corporate records because that can create some liability if not, okay?
The other big thing is the taxation. Corporations can be taxed at two different levels, both the corporate level and then at the individual level.
LLCs are typically taxed as a pass-through. So the income earned from the LLC goes straight to its members, to its individuals.
But then there's other ways and again, talk to your accountant about this, but look at things like an S election. Where, with that election then, if you make a certain amount, or depending on your individual status, where you are from a tax standpoint, it may make sense for you to do that because when you have an LLC, and it flows through to the individual, there's something called a self-employment tax, which I believe is in that 13 to 15% and something that a lot of people forget when it comes to an LLC is versus a W-2 employee, right?
A W-2 employee. They already get a lot of the taxes taken out of their paycheck. Well, when the money flows through from an LLC to its individual members, taxes aren't taken out.
If that conversation is not had with your CPA early on, you can get dinged for a lot of taxes at the end of the year.


Yeah. And you would like, for example, I have to pay sales taxes every month file.

I think it's like the 20th of every month. And then I have to have a business license that I have to keep up to date because, like you said, in Columbia County, in our area, you have to have a business license. A lot of times, people will ask for your business license. If you're using somebody else's property, they'll ask for your proof of insurance.

And that gets kind of technical, too, because can you get like an insurance on your business without being an established business?

So what are some things that can be affected if you're not a properly registered business?




Excellent. Great question. Yes, absolutely. Those documents not only are necessary from a legal standpoint, a tax standpoint, but also just from a pure operational standpoint. If you want a bank account, if you want insurance, you need to have all those ironclad in place.



Can you lose your LLC? Is there certain things you have to do regularly in order to maintain it, or is it once you've got it, you've got it?



Great question. Now remember, the LLC is actually governed by the state. The Secretary of State's Office. Every year for an LLC you have to pay $50 to maintain the annual registration if that's not paid by April 1st of the next year, right. You annual registration registration is due by April 1st of the following year, just $50. Then the Secretary of State's office can what's called "administratively dissolve" your LLC.
So now they will typically give you plenty of notice, but if you were to pull up the website and do a business search, you will find tons of LLC things that have been administratively dissolved because they don't pay their $50 annual registration.



And this is all public info. You can go to your state's website and see all the organized businesses. So if you're wondering if somebody that you're working with does have an LLC which can be, you know, like an easy way to kind of save yourself some trouble and go to the secretary of State's website and look up the name of the owner or the organization's name, and it will say in good standing or something or active, active compliant.

And then if it's been dissolved, it will say dissolved, which doesn't necessarily mean that it got taken away. It just means that they stopped paying it, right?




That's right. And there's a timeframe for when you can get back in the good graces with the secretary of state's office.
But as a rule of thumb, and I look at this from a practical standpoint, just like you just mentioned, if I'm going to go do business with somebody and I'm going to enter into a contract to… sell widgets or to provide a service, I don't want to look into the history of that business. I want to do my due diligence in that business.
If an LLC or any corporation has been administratively dissolved, just like you said, you can go to Georgia Corporation's website Business Search and it will tell you an entire history of that business. If there is a history that a business has been administratively dissolved three, four or five times, simply because they failed to pay their annual registration, to me, that would make me want to dig a little bit deeper.
Something as simple as that. And the Secretary of State's website will send you an email.
It is always best to have what I call a clean record with the Georgia Secretary of State's website, so make sure you stay on top of that. That's important, especially for potential investors, potential clients, or other types of customers.



And as far as like we're talking about for-profit businesses now, what about non-profit institutes?

Does it still work the same way for them to get set up?




Strikingly similar. So in Georgia, some states allow you to have a nonprofit LLC in Georgia that is not the case. LLC is or for profit. Then you can have obviously corporations that are for-profit and then what's called a nonprofit formation process is very similar. The naming is a little bit different.
For LLC the document you file with the Secretary of State's office is called the Articles of Organization for about a for Profit, and a nonprofit it's called Articles of Incorporation.
Okay, lots of same language for an LLC. The governing document is the operating agreement for a nonprofit and a for-profit company. They are called bylaws. Now, when you get into nonprofit, you start getting into the IRS language.
When you become a nonprofit, there's two agencies that you primarily need to deal with. You need to deal with the Georgia charities division, and you also need to look at the IRS. Many of you have probably heard of what's called 501c3.
A 501c3 is just part of the federal I.R.S. tax code, and it allows for deductions to charitable contributions. Typically, it's education, personal, religious, science, health.

But if your business qualifies, those that donate to your nonprofit can get deductions. And I'll tell you that I think it's really important because if you are looking to be a nonprofit with some potential caveats, you'll typically want to have 501c3 status, consult with your CPA, consult with your accountant about that, because a lot of the bigger donors, corporate donors or even foundations trust high net worth individuals will donate with the understanding that they can write that off because you have that 501c3 status.
So to circle back to where we were on that, there's certain language you need to have in your bylaws that meet IRS code sections, such as you will not use any of the funds for lobbying. You will not do it to ensure to the benefit of anyone outside of the charitable realm. There's very strict guidelines for you to maintain that. 501c3 status, and I recommend you put that in your bylaws as well, because lots of donors, especially the ones that are looking to give six, seven figures, will want to see a copy of your bylaws and we'll want to see the acceptance letter from the IRS that says you have 501c3 status.


Can you be a nonprofit organization and not have a 501c3?




Yes, you can. Absolutely you can.
So in Georgia, you can form a nonprofit. It's called a nonprofit domestic company. And you can do that without 501c3 status. There's nonprofit that does not have 501c3 status, a nonprofit that does. Both of them will get set up the same way. The only difference is the 501c3 status requires a couple extra steps that you take with your accountant to request the IRS.



So is it kind of like being verified by the government to get a 501c3? Like the government vetted you a little bit more? Not that if you don't have it, you're not trustworthy, but it is kind of like a… so I'm part of a couple of nonprofit organizations and like they're not, like you said, allowed to go to political events as the organization.

But if you didn't have a 501c3, would you be allowed to be affiliated with like political movements and lobbying and stuff.



So you could. That section, you would need to look under Georgia's Charities Act to make sure that there's you're not crossing any lines.



Like basically, do you have more individual freedom as a nonprofit if you do not get 501c3, but you also kind of lose some credibility?




So I think that's a very fair way to put it. So you're not your reporting requirements are as heavy if you're a Georgia nonprofit that's not worried about having 501c3 status, maybe there's a little bit of more freedoms, a little more flexibility. But the downside to it is those larger donors may shy away from it just a little bit.
When you create a business, the articles of organization or the operating grant and the bylaws, you're entering into a contract, legally binding contract between the individuals, the persons and the entity. And when you go into it with rose-colored glasses, everything's going to be great. We're going to be super. Our profit margins are going to be high. We're going to be best friends forever. You know, this type of stuff, it creates unanimous consent, right?
If you're going to enter into a business, make sure you have provisions in place.
If you decide you want to have unanimous consent. One of the things that you that are going to require unanimous consent that you vote on what things can be handled without that, speak to an attorney about that, absolutely.
Another thing is not following the terms of the operating agreement or terms of the bylaws to maintain that the personal liability protection.
Here's an example. Let's say there is a business of three people that sell widgets. One of them decides they want to sell their 34% interest in the company and, you know, for whatever reason.
So they just turn around and say, well, whichever one wants to buy them off, I'll sell it to you for fair market value.
Great. Well, let's say that one of the members steps up and buys it. Well, that member now has a 67% interest in the company.
But let's say the operating agreement requires that the company have first right of refusal or both members. There's a breakdown of a split. The operating agreement says here is how you're supposed to do it, and if that's not followed, you can argue that interest transaction, that transfer never happened.





This sounds like an episode of succession, to be honest.

It really is like something a I feel like people think applies only to corporate world or like, you know, millionaires doing these types of transactions.

But you're saying if you don't do this on a private level...



Absolutely, that could be catastrophic. One of the biggest things I see is, you've touched on it before, both of you have is: I have a small business, this stuff that really doesn't matter to me.
No, it absolutely matters to you.100%.
Make no mistake; there is no business that is too small.
If you have an LLC or if you have a corporate entity, a corporation, whether for-profit or nonprofit, it does not matter how small small you are. This stuff absolutely matters to you. Make sure you have it in place. Make sure you understand exactly what it says.
Don't do it after bad things happen. Do it to protect from bad things happening.


So we are going to split this wonderful talk up into multiple episodes. So stay tuned for part two, where we go over contracts and all the important information that needs to be put in, the contract stuff that can be left out, how important they are to your business. No matter the size of the business.


As well as some other stuff you talked on, that we also will be doing in later episodes, which is talking to CPAs or accountants to talk about that side of things.


And we'll also be talking to insurance agents to go over business insurance.


So make sure you stick around for all those other episodes that will help tie into this one as well as you progress in your business, and we also want to thank you for being here.


Garrett, Can you tell us a little bit about your practice and what you specialize in? This way people can contact you if they need your services.



Sure. Yeah. I was unique because I was a financial advisor for approximately 12 years prior to becoming an attorney. So I do estate planning, but I also do litigation. I pride myself on my practice being a boutique law firm.
It's not necessarily volume is not quantity over quality. Customer service is number one in our business in my practice.
So if anybody ever has any questions or are always feel free to reach out the website is www.GarrettMurphyLaw.com
Email is Garrett@GarrettMurphyLaw.com


Disclaimer:

And remember, while we aim to provide you with practical and knowledgeable advice, it's important to do your own research and consult with a professional before making any decisions that could impact your business.

The information we provide is for educational purposes only and should not be taken as legal, financial or any other professional advice.


And with that, we want to thank you for tuning into Clever Entrepreneurship: Beyond the Boardroom.

Until next time, keep building and growing your business.



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