Once we knew where we were going and who’d be responsible for what, we needed to start thinking about two things: how do we take people’s money and how do we protect ourselves from liability.
The first thing I did once I got back to the States was to start researching incorporation options. First, let me say that if you are looking to incorporate, do not google it, it will suck you in like a black hole, you’ll lose a month of you life and hate yourself later. But of course, that’s exactly what I did. I found blog posts and YouTube videos and all manner of tutorials … and none of them said the same thing. Every website I read would contradict the previous one, and I spent weeks trying to piece together what was actually needed. This might seem weird to you, but there are three things to remember: two-thirds of my team is not resident in the US, I’ve never done this before, and I don’t know anyone who has to whom I could ask questions.
The first question that kept popping up was what state should we form the company. Being resident in Alabama, that was an obvious choice but the internet is full of articles about how Delaware, Nevada, New Mexico, and Wyoming are better options. The googles will point you to companies who will do all the paperwork to get you setup in those states. The thing none of those websites would tell me, though, was why. What are the benefits of one state over the other? How does incorporating in a state where I’m not resident affect my taxes? Can I have a bank account out of state? And of course none of them had any information about non-resident partners.
I went to a meetup where I learned about a few government and non-profit businesses that would help you get started. As I understood it, they had people on staff who could answer questions about all this contradictory advice I’d been reading. I contacted the Small Business Development Center and SCORE, both of them took about a week to reply, and both turned out to be almost useless. Well, that’s not fair, SCORE was 100%, completely useless.
Since I was getting frustrated waiting on these companies to reply, I emailed a local lawyer. I had been hesitant to contact a lawyer since I don’t trust anything they say, but this guy seemed reasonable and was willing to talk to me without requiring a second mortgage.
I heard back from the Small Business Development Center in the meanwhile and set up an appointment. The guy I met there was pleasant and outlined the process of setting up an LLC in Alabama. I finally learned that since I was setting up an LLC, I was setting it up with “flow-through” taxation. And since I had no need for outside investment, there was no benefit to incorporating in another state. I won’t belabor the point except to say that it is far easier than the internet would have you believe. In our case the only thing that was required besides the two-sheet certificate of formation was an operating agreement, and that was only required by the bank to know who owned the company—the state of Alabama doesn’t keep operating agreements on file.
After leaving the SBDC office I felt I had a pretty good grasp on what was needed to start the LLC, but had already made an appointment with the lawyer for the following day. When I showed up to his office, he did the thing that lawyers always do and started telling me how everything was going to fall apart, how my partners were going to sue me, and how it was very likely that the IRS was going to indict me for tax fraud before I left the building.
I explained how we wanted to operate, how we wanted to be paid, and that Ryan and Zine are not resident in the US, but that Ryan is a US citizen. It might be important to note that if you have foreign partners—meaning non-resident and non-citizen—and you make them members of your LLC, you will be required to withhold 35% of their payouts for the IRS. Ryan and Zine decided they were happy to be paid as contractors and didn’t need to be members of the LLC. Of course the lawyer said I’d need him to write a custom operating agreement and contractor agreements for the both of them because it was likely they were planning to sue me.
If you’ve set-up a company before or read anything about it, you’ll be familiar with the term registered agent. As I understand it there are three addresses you’ll need to concern yourself with when setting up a company: where do you physically do your business, where do you get mail, and where should legal papers be sent in the event you are sued. For the average company all three of these are the same, but the internet won’t make this obvious and will even try to convince you they should all be different. Since I’m living on the family farm, the farm address is the only Alabama address I have. The afternoon I returned from the lawyer’s office, my dad tells me he doesn’t want me to use the home address as the registered agent address. He tells me he doesn’t want my company to get sued and for them to be able to take the house. I try to explain that this is not how it works, that if it did work that way commercial real estate wouldn’t exist, that no landlord would be willing to lease a property if the property could be liable in some other company’s litigation. Of course, he’d made up his mind and logic was not playing into this decision. I had all but decided, after meeting with the SBDC and the lawyer, that I didn’t need anything special from a lawyer and I’d just use a templated operating agreement to satisfy the bank, but now I had to call the lawyer back and ask if he’d be my registered agent. A few days later I found myself back in his office paying for the registered agent services. With this new relationship established, I found it too difficult to tell the lawyer I thought he was wrong about everything else, so I just paid him to draft an operating agreement specific to our circumstances.
The one thing that might prove fruitful about all this is, after learning that I’m a Marine, his paralegal started telling me about an organization for Vietnam veterans where her father is a member and how they might like to go on a tour of southeast Asia. I had never thought about using my military connections to sell tours. Maybe this will end up paying for these legal documents I’m very unlikely to ever use.