Up Start Legal

We specialize in forming LLCs for new businesses. The LLC is generally easier to manage than an S corporation and offers the same benefits of limited liability and pass-through (or single-level) tax treatment to its owners. And, if there is only one owner, the LLC doesn't require a separate tax return with the IRS. Down the road, the LLC has the benefit of offering flexibility if you are going to raise money or add other owners. While there are circumstances in which an S corporation makes sense, these are typically local tax-related issues that don't materially impact the decision to become an LLC.

Applicable State Filing

An LLC must register in the states where it conducts business. If your business provides services from a local office (or home office) or at clients' locations in the same state as your office, then it generally makes sense to form your LLC in the state where your office is located. Forming the LLC in another state does not mean you can bypass filing taxes in the state where your office resides. To save extra filing and registration fees, and to simplify your tax filings, we assume that your LLC should be formed in the state where your principal office is located.

State Records Name Search

Your LLC needs a name that is dissimilar to other entities in its state of formation. It is also advisable for you to choose a name that won't be confused with other existing businesses. In our Tutorial/Questionnaire, we ask you to provide several name options, just in case your first choices are not available, and we check those names with the state before we file for your LLC.

Note: We do not perform a trademark search or search the name in other states. If you intend to brand your company name, or conduct significant business outside your state of formation, we recommend that you engage a competent attorney to handle the search to assure that your desired name will be clear of claims from others.

Registered Agent Designation

Most jurisdictions require that any business registered within their borders designate a "Registered Agent" to receive service of process. If you maintain an office in the state where your LLC is formed, you can serve as the Registered Agent for your LLC, and do not need to retain the services of a third party Registered Agent. Unlike other online companies, we do not offer this service or suggest that you need to undertake this expense.

Limited Organizational Formalities

One of the advantages of the LLC is that there are limited legal requirements in terms of organizational formalities. For example, it isn't legally required to issue membership certificates (like stock) or maintain a corporate kit with a seal (like corporate minutes). So in practice, most small LLCs do not undertake these non-essentials. Therefore, unlike many of our competitors, we will never try to "up sell" you on things that you simply don't need.

Easy Corporate Governance

Another advantage of the LLC is that there are limited legal requirements in terms of ongoing corporate formalities. For example, the UpstartLegal.com form Operating Agreement specifies that your company will not be required to hold regular meetings of the members or, unless the members desire, appoint officers of the company.

Professional Services Option for Designated Professions

LLCs can be used in most states for professional practices; e.g., accounting, law, medicine, architecture, engineering, etc. In many states, a special election must be made in the certificate of formation or organization to register the LLC as a professional practice. Once elected, the professional LLC typically can only be used for that purpose, and the company's Operating Agreement will include certain provisions reflecting the professional practice election and limitations. Our service includes the professional LLC option at no additional cost, with the exception of any required state fees.

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In addition to filing a certificate of formation in your state, the IRS and many states require additional identification numbers for your LLC. Generally, businesses need both Federal and State numbers, so we include both filings in our Upstart Package at no additional charge.

Note: Our service does not include additional state and/or local level filings (some of which may be required for the conduct of your business), such as local licenses, permits and registrations, employment, sales, use and other tax registrations, or professional licensing.

The Operating Agreement establishes, among other things, the management structure of the LLC and the economic rights of the owners. In an LLC, owners are referred to as "members" (as opposed to shareholders in a corporation), and their ownership interests are referred to as "membership interests" (as opposed to shares of stock in a corporation).

Ownership Percentage Designation

Our Operating Agreement considers that the membership interests in your LLC will be expressed as percentages, which reflect the relative capital contributions of the members. When completing our Tutorial/Questionnaire, we will ask you to provide the respective ownership percentages and capital contributions for yourself and any other members, to ensure that we set up your LLC in accordance with your desired business arrangements.

Management Designation

The UpstartLegal.com form Operating Agreement assumes that your LLC will be managed by majority vote of the members as a group, based on their percentage ownership. Accordingly, if you are the sole member, then your 100% membership interest obviously constitutes a majority of the members. If there are two 50/50 members, then both of them must consent under this structure. If there are multiple members, then so long as you retain greater than 50% membership interest, you will control the management of the LLC.

Alternative management structures are available. For example, the agreement may provide that you will have exclusive control of the LLC even if there are other members (i.e., they won't have the opportunity to vote, notwithstanding that they are owners). Or, it may provide the minority percentage members with veto rights over certain significant actions of the company. If you are interested in these provisions, please contact us.

Allocations and Distributions of Profits

In addition to any regular compensation for their work on behalf of the LLC, the members are entitled to any net profit that the company may produce. The UpstartLegal.com form Operating Agreement assumes that profits and losses of the LLC will be shared among the members, if there are more than just you, on a pro rata basis in accordance with their ownership percentages in the LLC.

Indemnification Provisions

Companies frequently agree to indemnify, with some exceptions, the members and management of the LLC against certain costs they may incur as a result of their participation in the LLC. More specifically, the LLC will often cover defined litigation costs and damages of its members, managers, employees and officers that they may face personally as a result of decisions they make, or work they do on behalf of the company. The UpstartLegal.com form Operating Agreement includes a standard set of these indemnification provisions, though certain states have laws that may limit the circumstances under which they may apply.

Transfer of Ownership Restrictions

Because we assume that all of the members of your LLC will either be active in the business or "relationship" investors, our form Operating Agreement prohibits each of the members from transferring their membership interest without the prior consent of the other members. This prohibition has the effect of keeping the company and its business together without unwanted or unapproved participants. This also forces a member who desires to exit, whether voluntarily or otherwise, to do so in a way that is satisfactory to the other members. If you prefer free transferability (i.e., the right to sell or gift membership interest to anyone without the consent of the other members), please contact us.

In most small businesses, the members want to provide for the purchase of an exiting member's interest on certain events. Typically, these are events where the member can no longer be active in the business or does or experiences something that adversely affects the member's rights (breach of the Operating Agreement or any other agreement with the Company, death, disability, failure to provide adequate time and effort to company, etc.). As a consequence, the company has the right or obligation to buy back the membership interest of the member. The UpstartLegal.com form Operating Agreement includes these buyout provisions. The company will pay $1.00 for a purchase in the event of a materially adverse action by the member or the member's breach, or if the member quits working for the business. The company will pay an appraised value, over a time period, in the event of a member's death or disability.

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How you bring in revenue will be key to your business. You will want consistent legal terms across your client base, with clear allocations of responsibility and protections against liabilities you do not expressly accept. This agreement includes a standard set of contractual terms and conditions, with a schedule that you can modify for each client to reflect the particular services and pricing structure.

Ownership of Work Product

Our Client Services Agreement makes the assumption that your clients, as purchasers of your services, will want to know that your work is provided to them in accordance with applicable laws and without infringing on the patent rights, copyrights, trademarks or trade secrets of any third parties. Additionally, we assume that when the client pays you in full, the client will own all of the copyrights in the work you produced for the client (if applicable). However, the Client Services Agreement specifically states that you will not grant any rights to the client in your own intellectual property or any rights other than the work you actually produce for the client. Additionally, nothing you created prior to your engagement with a specific client will belong to that client.

Limitations on Liability

A common entrepreneurial mistake is failing to address the consequences of problems and liabilities that may arise out of the provision of their services. The UpstartLegal.com Client Services Agreement adopts a multi-layered approach that (1) spells out the allocation of liabilities both between the LLC and your client, and in the event of third-party claims, (2) limits the areas of your LLC's liability to a defined set of circumstances (such as breach of confidentiality obligations, violation of third-party IP or other rights, and your company's negligence) and (3) caps the damages that the client may receive based on actual (as opposed to consequential) damages, and a maximum tied to the fees paid under the agreement.

The Mutual Non-Disclosure Agreement (NDA) is intended to protect against the disclosure of confidential information and materials you provide to another person or company. It also includes a prohibition of the other party from using the information and materials you disclose for that person's or some else's financial benefit. To ensure mutual fairness, the NDA imposes reciprocal obligations on you, which cover the confidential information and materials of the other party.

Equitable Remedies

In the event that the other party breaches its confidentiality obligations, you may not be able to quantify your damages in money. These provisions expressly grant you the right to ask a court for an injunction that orders the other party to cease the breach. Enforceability of these provisions will vary by state, and you will have to evaluate whether the expense of legal action is justified under the circumstances, but it is advantageous to include the provision in the NDA.

Should you need to engage subcontractors, you will want to clarify the work they will provide, how much they will get paid, and when and where the work will be performed. The UpstartLegal.com form Subcontractor Agreement covers these matters, as well as intellectual property assignment provisions and certain restrictive covenants to protect your relationships.

Note: We purposefully include contractor, rather than employment, documentation in our Upstart Package because we assume that (initially) you will not be hiring people on a W-2 employment basis. Whether a worker is an employee or contractor, however, is frequently not a simple determination (see the IRS website for guidance). Please contact us for assistance when it is time for you to make your first W-2 employee hire.

Work Made for Hire

It is likely that your clients will require a representation from your LLC that the work it provides (including work your subcontractors provide) will not violate the intellectual property rights of others. One aspect of this is to ensure that work that you engage others to perform for you belongs to the LLC, and not the person you engage. The work made for hire and intellectual property assignment provisions in the form Subcontractor Agreement are intended to provide those rights to your LLC.

Non Circumvention

Restrictive covenants impose prohibitions on the subcontractor from soliciting your clients, employees and other key business relationships during the agreement term and for a period of time after termination. While the enforceability of these can be questionable, and varies from state to state, it is important to have a statement that the contractor will not compete for your client that you've introduced him to.

The Referral Agreement addresses situations in which you will want to pay someone outside your company for referring business to you. This agreement describes which referrals will be covered and how payments will be made. The Referral Agreement also provides that your company will have the exclusive right to determine the terms of any client relationship, notwithstanding a referral, and asserts your ownership of the client relationship after the referral. Though referral business is often done without a contract, this agreement represents a simple level of formality that will add clarity to the terms of a relationship.

Scope of Authority for Referring Parties

If someone other than you is talking to potential clients about your company and services, you need to be certain that all legally binding statements regarding your work and contractual commitments are ultimately made by you or other authorized members of the company. The Referral Agreement includes provisions that address these issues by clarifying the limited scope of authority granted to the referring party.

To cover against violations of authority and other improper acts of the referring party, the indemnification provisions of the Referral Agreement obligate the referring party to cover the cost of claims and damages against your LLC arising out of such matters.

We strive to assist you in creating a professional product. We will thoroughly review the documents you produce through our service before we send them to you. We check for completeness and accuracy based on the questions in our Tutorial/Questionnaire, and will contact you if we have questions or believe additional information is required.

We recognize that you may have comments which you would like incorporated into your documents after you review them. Our customer support team is always available for questions, and we will provide a one-time "round of revision" opportunity for you to provide specific written comments via email. We will then attempt to incorporate these comments into your documents. However, we are not a law firm. Accordingly, we will only provide you with a set of form agreements and cannot fully-customize your documents.

We have included a checklist of non-legal issues for startup companies for your convenience in our free Upstart Kit. This list is based upon our experience assisting in the formation of new businesses, and includes areas such as space, finance, technology, insurance and marketing. Your needs may vary, but we hope you find this a helpful starting point.