members of an LLC are able to divide company profits in any manner, regardless of ownership in the company. This flexibility allows an LLC to allocate profits and losses to the greatest tax benefit of the company’s members. Every state recognizes the structure, and there is greater flexibility in how they can be organized and managed.
Limited liability companies can usually sell “stakes” in the business, which act a lot like the standard shares of a corporation. The difference is that anyone who buys a stake, no matter how small, will have as much decision-making power as any other member of the LLC.
Certain types of businesses that provide professional services requiring a state professional license, such as legal or medical services, may not form an LLC, but they use a very similar form called a professional limited liability company (PLLC). In Europe and Asia the LLC structure is replaced by the Limited (Ltd.) entity. They are not exactly the same, but the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company.
Who Is the Registered Agent?
You are required to name a “registered agent” in the state of incorporation. A registered agent is simply someone who is available during normal business hours to receive legal and tax mail for the company. Designate yourself as the registered agent because you are the one who collects the mail. Most online companies do not explain this, and they can trick you into paying unnecessary fees to act as the registered agent for your company.
What Are the Articles of Incorporation?
All new LLCs must file articles of incorporation, which are also called “articles of organization,” with their secretary of state’s office. That sounds intimidating, but it is just a short form that records the names of the LLC and its members, along with their contact information. A single-person entity has one member who is also a manager, and that person becomes known as a member-manager.
Although this is often not required by law, you will be offered the chance to draft an operating agreement for your LLC that spells out the details of the business arrangement, including percentage ownership for you and any other shareholders, along with roles, rights, and responsibilities. For most single-person companies, you simply assign 100 percent of the share of ownership to yourself. If others are involved, the online form isn’t much more complicated than filling in their names and mailing addresses.
By failing to prepare, you are preparing to fail.
— often attributed to BENJAMIN FRANKLIN
Once you’ve incorporated your winning idea, the next step is to create a business plan. Most entrepreneurs want to avoid or skip this, particularly if they aren’t trying to attract investors. However, no matter what your business, I think creating a business plan is the best way to start. Not producing a business plan is like trying to build a car from scratch without any instructions. The process of drafting the plan is the way you figure out how to build and run your company. Further, it’s the way you test-drive that car to see whether it works before you risk taking it out into the real world.
I have gone through the business-plan process for each of my four companies. For two of them I went through the process again during their growth stages. In each case I produced a lengthy document that served as my bible when any vendors or investors asked me any questions, and I always sounded like a confident and knowledgeable entrepreneur on conference calls while my fingers did the walking through the pages. But no one has ever asked me for a copy of a completed business plan. This supports my theory that the primary purpose of the process is to benefit you, the entrepreneur.
Discussing the business-plan process means getting into the minutia of markets, business functions, and financials. Personally, I think reading about business plans can be a bit boring, but I can assure you that the process itself is not. Ultimately, success isn’t measured by the document you produce but by what you as a business owner learn about your market, the customers, and the competition.
Another reason for going through this process is to help attract investors and your preferred vendors. For investors, your plan needs to include an executive summary, from which you develop an elevator pitch, and we’ll look at those in detail. If you are self-funding, you don’t need those. For vendors, you need to focus on and share the specific sections relevant to their service, whether that’s manufacturing, financial forecasts, or marketing.
Invariably, during the process, you will discover unexpected problems and opportunities, and you may need to adjust and adapt your plan, product, or service accordingly. Basically, that is the main point of doing this in the first place. Even if no one else reads the plan, this ensures that your business will fix what you want to change and do so in a way that supports a successful business.
Finally, through this process of discovery and decision-making, you will continue to rewire your brain and build self-confidence and expertise. You will acquire deep insight into your prospective customers and the market, and you will continue building positive psychological momentum. By the time you finish the process, you will be itching to get started as your own boss.
Yet despite the evidence for the importance of completing a business plan, one study by Inc. magazine found that only 40 percent of the founders of companies on its top-500 list had bothered to write a formal business plan. Only 12 percent said that they had conducted formal market research before launching their enterprise. Is it any wonder that so many startups fail?
There are no shortcuts to success.
A Business Plan Is a Process That Cultivates Success
To me, what’s most important about a business plan isn’t the final document. It is the process. The process of investigating your business, your customers, and your market is another form of reacting forward. In the end, your winning idea, as originally conceived, may not make the ideal business, but through this process you will learn what does and will make a successful business and how to see it through.
Research and experience back me up. A producer of business-plan software conducted a survey that found that those who complete business plans are nearly twice as likely to successfully grow their businesses as those who don’t write a plan. Regardless of the type of company, the growth stage, or the person’s intention for the business plan, the study found that writing one correlates with increased success in every business goal the study identified. These included obtaining a loan, getting investment capital, making a major purchase, recruiting a new team member, thinking more strategically, and growing the company.
The authors concluded: “While our analysis cannot say that completing a business plan will lead to success, it does indicate that the type of entrepreneur who completes a business plan is also more likely to run a successful business.”
This raises an interesting question: Are the people who are most likely to succeed anyway the ones who usually create business plans, or does drafting a plan help teach and instill the behaviors of a successful entrepreneur? I think it’s both.
One way we learn is through imitation, and this is hardwired in the brain. In the early 1990s, a team of Italian researchers discovered individual neurons in the brains of macaque monkeys that fired
