The ABC’s of LLC’s with Imani Law

Navigating the Basics: Essential Steps to Setup an LLC

In our latest episode of the Small Business Matters podcast, we dive into the topic of forming and managing Limited Liability Corporations (LLCs) with legal experts Carmel and Camellia Imani, co-founders of Imani Law. The sisters, both UC Davis School of Law graduates, specialize in helping entrepreneurs establish their businesses and secure trademarks, emphasizing preventative legal measures to avert potential issues.

Watch Our Interview

Episode Summary

We start off with a spotlight on the rising number of small businesses in the U.S., highlighting the surge to 5.5 million new ventures in 2023, and a popular choice among entrepreneurs is to form LLCs. The Imani sisters share their transition from litigation to transactional law, which aligns better with their goal of aiding small businesses before legal troubles arise. Their approach, characterized by flat rate fees and transparency, has resonated well on social media platforms like TikTok and Instagram.

During our conversation, the Imani’s detail the advantages of LLCs over other business structures, primarily the flexibility and protection they offer. Carmel explains that LLCs are ideal for individuals starting alone who wish to avoid the complexities and formalities of corporations. Camellia outlines the steps to setting up an LLC, which vary by state but generally include conducting a name search, drafting articles of organization, and subsequent filings such as the statement of information and obtaining an EIN (Employer Identification Number.)

The discussion also covers the financial aspects of forming an LLC, with emphasis on the variability of costs across different states. For instance, California has a relatively high annual tax fee for LLCs. The benefits of LLCs, such as limited liability protection and tax flexibility, are highlighted as major reasons for their popularity among small business owners. We explore tax treatments and the customizable management structures of LLCs, allowing business owners to tailor their setups according to their specific needs.

We also touch on potential pitfalls and common mistakes in forming and maintaining an LLC, such as the improper separation of personal and business finances, which can jeopardize the legal protections offered by an LLC. The Imani sisters stress the importance of an operating agreement and regular compliance with state requirements to maintain the integrity of the LLC’s protective structure.
For entrepreneurs looking to minimize startup costs the Imani sisters conclude by mentioning a offer resources for entrepreneurs with limited funds, including a tutorial series designed to help individuals set up their LLCs independently at a lower cost.

Key Takeaways:

• Flexible Structure: LLCs offer a simpler and more flexible structure ideal for individual entrepreneurs or small partnerships.
• Preventive Legal Support: Engaging with a law firm specializing in business formation early can prevent future legal complications.
• Cost Considerations: Understand the initial and ongoing costs associated with forming an LLC in your specific state.
• Separation of Assets: Strict separation of personal and business finances is crucial to maintain liability protection.
• Resource Availability: Utilize available resources such as tutorials from experienced attorneys to reduce setup costs.

We invite our listeners to watch the full video interview on our platform for more in-depth insights and expert advice from Carmel and Camellia Imani. Their practical guidance could be instrumental in navigating the complexities of business formation and legal compliance effectively.

What follows is a lightly edited transcript of our conversation

Gary Stockton: Each year, there are roughly 4. 7 million new small businesses created in the U. S., but according to the U. S. Census, that number shot up to 5. 5 million in 2023, the highest year on record. And many of these new ventures are limited liability corporations or LLCs. And with so many small businesses being created, we thought it would be a good time to talk about LLCs. How they differ from other business structures and what advantages you have as a business owner by forming one.

Our show research on TikTok led us to discover Imani Law, co-founded by Carmel and Camellia Imani. This forward-thinking law firm specializes in aiding entrepreneurs with business establishment and trademark security.

The Imani sisters, both UC Davis School of Law graduates, have shifted from litigation to focus on transactional and preventative practices to safeguard clients. Notably, their firm is recognized for its flat rate fees, transparency, and approachable manner, effectively engaging with the online community through platforms like Instagram and TikTok.
Carmel and Camellia, welcome to Small Business Matters.

Camellia Imani: Thank you. Thank you for having us.

Carmel Imani: Thank you.

Gary Stockton: it’s so great to, to make new connections for Experian through our social media channels. and we’ve been so impressed with your approach, particularly on TikTok. What is your favorite aspect of, practicing law? Maybe we could start there, especially in the context of helping small businesses and entrepreneurs?

Camellia Imani: Yeah, it’s really nice now that we don’t litigate anymore, everything we do is transactional. What’s nice is we get to help people, before. for the problems start and then advise them on what to do so that they don’t have to run into problems.

I think people, when they think about law, they think of litigation, they think that there’s, going to be, complicated and costly, but we get to work with people and tell them it doesn’t have to be like that. yeah, I think that’s one reason why we really like our jobs. It’s a very happy environment and we get to help people every single day.

Gary Stockton: So, what are the main differences between an LLC and a corporation and how do these differences impact small businesses and entrepreneurs?

Carmel Imani: Yeah, that’s, a great question. we, we talk to people who are starting up their businesses every day. and they have that same question, and it really depends on, what their business is, what their goals are. it’s really not a one size fits all, and that’s why there are that those options out there. and so when we get on the phone with the potential client, we go over the differences, for them in their, depending on what type of business they have. And there are different rules that will apply depending on what type of profession you have.

But the biggest difference is that, corporations, there are more formalities that are involved. LLC is more of a simple structure. So if you’re just starting out on your own and you don’t want to be a sole proprietor, and you want to file paperwork. Usually LLC is the best way to go if you’re not, trying to sell stock in your business and have investors, we usually recommend the LLC route.

Gary Stockton: What are the basic steps involved in setting up a, an LLC and how might these steps vary from a state to state? Camellia?

Camellia Imani: Yeah, every state has a different process. I can tell you with California and what seems to be common with other states is the first is obviously we want to do a name search.
You want to make sure that your name is not taken with your state because two different LLCs can’t have the same name. After that, draft the articles of organization, you file them with the state, you wait for the state to get back to you, and then where I think a lot of business owners, don’t, what they don’t think about, and we don’t blame you, how would you know this, is that there is also steps you take after the filing, And that can include, for example, in California, you have to file a statement of information within 90 days.

I know other states have that as well, where there’s that additional filing you need to do. And then there is, filings you have to do or things you have to do that are related to the LLC. So now there’s also that beneficial ownership information requirement that needs to be filed within 90 days. There’s also getting an employer identification number with the IRS in order to identify your business. And then there is getting a business bank account and a business credit card. So that’s what I would say is very common with every single state. And then there’s like the minor things that every state does different, but that’s a pretty good overview of what every state requires.

Gary Stockton: Understanding the cost vary from state to state, can you give us a sense of the kind of cost enter entrepreneurs should expect when forming an LLC, including both the initial setup and ongoing expenses?

Carmel Imani: Every state has its own filing fee. so in addition, first, So for example, in California to file your LLC, the filing fee itself is 70, and then of course there is the added cost. If you go to work for a third party service to do it for you, there’s an added cost for that. Or if you have an attorney draft your paperwork, there’s, there’s, more money associated with that, of course, more fees. but then there’s also yearly tax fees that everybody has to pay regardless of if you make money with your LLC or not so let’s say you just have an LLC in California every year you have to pay $800, and every state is different so California it’s a higher fee than most states to have an LLC but you have to pay it regardless of if you make money or not.

Gary Stockton: What are the main benefits of operating as an LLC compared to other business structures and what are some of the limitations business owners should be aware of?

Camellia Imani: Yeah, great question. So limited liability companies LLCs. The biggest thing is that limited liability. So for a lot of business owners, there’s risks they may want to take and making your personal assets and your business assets separate are really great because you can take greater risks. And then of course, if something does happen, unfortunately in your business and you get sued, if you’re doing everything properly with your LLC, then you will have that limited liability. So your personal assets will not be at risk. That would be the biggest, pro of having that LLC. And then as far as, another one would be tax benefits. So one thing that LLCs can do is that they can choose how they want to be taxed. So a common tax election people take is S-Corp. So you can save a lot of money on your business and by choosing to be taxed differently. And that’s something that you wouldn’t be able to do if you were a sole proprietor.

Now, when it comes to the cons of having an LLC and limitations, really the biggest one is just cost. but that’s with everything in business, right? There’s always going to be a cost to something. So for majority of business owners, the pros always outweigh the cons.

Gary Stockton: Now, you mentioned taxes, a second ago. Let’s get further into that. Can you explain, the tax treatment of LLCs and how business owners might decide between being taxed as a sole proprietor, a partnership versus electing, S-Corporation tax status? What are the tax advantages?

Carmel Imani: The way that you are taxed when you file an LLC really depends on, how many members are in your LLC. So let’s just say it’s just one person, then you will be taxed as a sole proprietor or taxed as a disregarded entity, just because you are a sole member. but if you have more members in your LLC, let’s say you and your partner, start an LLC together, then you will be taxed by default as a partnership.
but the good news is that, there are these default tax statuses that you are given when you file for an LLC. the good news is that you can always change your tax election, which a lot of people do. instead of accepting their default tax status, they file additional paperwork to file, to, be an S-Corp, to be taxed as an S-Corp. So you have that option as well.

Gary Stockton: And you, mentioned partnerships, a second ago, let’s talk about management structure. How does the management structure in an LLC work and how can it be customized to fit the needs of different businesses? Is it customizable?

Carmel Imani: Yeah, so you can always be, have a member managed LLC or a manager managed LLC and the laws differ per state. But in a member managed LLC, every single member of an LLC has total control and then in a manager. member LLC, the manager, there’s only one person who’s doing everything. And then, and then you have members of the LLC it’s, more of like a corporation structure, but by default, most people elect to have that member managed where it’s all members of the LLC, so both partners have equal, say in the voting and equal say in, decisions of the LLC.

Gary Stockton: Okay. Thank you. So liability protection, that’s a big one with, LLCs. How does an LLC protect its owners, personal assets? And are there any scenarios where this protection might not apply? you mentioned a few in, in some of your, TikTok videos.

Camellia Imani: Yeah, this is a great question because I think that this is something a lot of business owners don’t know about until it’s too late. So with LLCs, again, the advantage is that you’re separating your personal assets and your business assets because now what you’re doing is you’re operating under your business as opposed to you personally. And you’re telling the government, Hey, we’re separate. I’m a person, but I also have this business. A common way that people mess up and they don’t realize it is, one, when they sign contracts, they sign it on the behalf of themselves personally as opposed to on behalf of the business.

And so we actually have a couple TikToks where we show exactly how to sign business, how to sign under your business, right? You want to make sure that you’re showing that you are the owner or whatever management structure you have. that’s your role within the LLC and you’re not signing the contract personally, because if you do sign it under yourself personally, and then you have to go to court, it might show that, you’re doing this as a personal transaction versus a business transaction.

And then the second issue that could come up is a lot of business owners think that filing their LLC is all they need and they’re good to go. but this kind of goes back to what we talked about earlier, which is that filing your LLC isn’t enough. You want to make sure that you have that business bank account and that business credit card so that you’re really showing the state that hey, we are actually separate. I’m not just hiding behind my business. So you fully have to take all of the steps when filing your LLC to make sure that your LLC is actually protecting you.

Gary Stockton: So what are the requirements for maintaining the limited liability protection of an LLC? And what actions could potentially pierce the corporate veil?

Camellia Imani: Yeah, you want to make sure that you always keep your LLC active. And again, this varies from state to state. with California, LLCs have to file their statement of information every one to two years. You want to make sure that you’re keeping up with the franchise tax that you have to pay yearly and then you want to make sure that when you have a business transaction, you’re doing it through your business bank account or your business credit card.

You don’t want to co mingle your funds because then that could tell, the court what might happen if you get sued is something called piercing the corporate veil. And if somebody does take you to court, and then they’re subpoenaing all your documents, they can say, Hey, look, this person is one in the same with their business. They’re using their business bank account for personal transactions and vice versa.
So that’s a big no. No, you don’t want to do that. Keep everything with your business separate from your personal stuff

Gary Stockton: So how important is the operating agreement for an LLC and what key elements should be included in that document?

Carmel Imani: An operating agreement. is the best way to think about what an operating agreement is that it’s a rule book for your LLC essentially. So it tells, if anything happens, and you go to court, there’s two things that can happen. If you don’t have an operating agreement, the state law will apply on how to treat your LLC. But if you have an operating agreement, now that operating agreement will apply instead of the default state laws. And so in that operating agreement, it’s really important to have, what are the rules of each member? especially if you have a partnership, what happens if, you want to dissolve your LLC? How are those proceeds distributed at the end? How do you want to wind down the LLC? There’s a lot of differences, when we do the operating agreements, we make sure to have every single scenario that could happen. What if a member dies? there’s a lot that can happen and you want to just make sure you’re covered in every scenario so that, when you, if you ever have to end your LLC or, wind down, you know exactly how to distribute those proceeds.

Gary Stockton: So what are some common pitfalls or mistakes that you see entrepreneurs make when setting up an LLC and, how can they be avoided?

Camellia Imani: thankfully that a lot of the common mistakes that could occur with setting up an LLC and having one can be avoided. You just have to, make sure you know what to do cause you don’t know what you don’t know. The main one is not following the steps. So after the filing, make sure you’re keeping up to date with the LLC. the other one is commingling funds like we talked about earlier, make sure that all of your business expenses or any income is in a business bank account versus a personal one.

Just keep everything separate is a general rule of thumb. And then make sure, yeah, you’re up to date on any state filing, because if your LLC is inactive, then that’s going to be a huge problem. and then the other last one is sometimes, not all business owners need an LLC, right? There is a different type of business structure that’s actually required by the state. Southern California, for example, if you’re a professional, you actually aren’t allowed to have an LLC. You need to have a professional corporation. So that’s actually been an issue where a lot of people will come to us after their business is filed and they want to come to us for a trademark. And then what ends up happening is we look up their business with the state and we tell them, Oh, actually, this is not the correct business structure for you.
So then we have to refile all of the paperwork for them. And it’s costly, because now they’re doing this process all over again when, unfortunately if they had just had it set up properly the first time, they wouldn’t have to go through this. But, all of that can be avoided, right? making sure you have the right information, talking to a business attorney can help that. But, yeah, all of it can be avoided. There’s just a couple things you need to know, and once you know it, you’re good to go.

Gary Stockton: So a lot of these businesses that are starting up, a lot of them are bootstrapped. A lot of them don’t have, let’s say that they don’t have the, a big, bank account with funding for attorneys.
Do you have. Any recommendations for entrepreneurs who don’t have a lot of money to pay for lawyer and set up of their LLC?

Carmel Imani: Yeah, we actually, we actually came up with a tutorial, that we pre recorded where we personally walk. through walk you through exactly how to set up your LLC, exactly how to do, file all the documents, how to fill them out correctly, with the state of California. And we, have it up on our website. So that people can do it themselves so that they’re not spending, sometimes even thousands of dollars on an attorney instead of attorney having to do it. We walk you through exactly how to do that for, a small fee. and so that is a great way. It’s like having an attorney by your side without really paying hourly for that attorney’s time.

Camellia Imani: And in the videos too, because we’ve been doing this for so long, we’ve had every question come up. So we’ve been able to preemptively answer these questions in those tutorials, whether it’s what to put on certain spots of the filing, what to do next. And then on top of that, we also include, for example, the operating agreement because every LLC needs one. So then we just put that in there because we want you to have that. So it’s fully comprehensive. You won’t need to then outsource and go to an attorney for anything else. We give you, we tell you what documents you need for your business bank account, exactly how to get one, exactly how to get your EIN, your employer identification number. So it’s fully comprehensive. there’s nothing that you would have to do on your own. So we were very proud of it. We spent a lot of time, perfecting it. and we’ve had a lot of business owners come to us and say that has been really helpful and they didn’t have to shell out thousands of dollars for their business.

Gary Stockton: Excellent. Ladies, this has been very enlightening for me. thank you so much for coming on, Small Business Matters and sharing your legal insights. Again, we’re going to remind our listeners, this podcast episode isn’t official legal advice. For legal advice, you should reach out to an attorney. But if people want to reach out to you, Camellia and, Carmel, how do they find you?

Camellia Imani: I was going to say, we’re very active. you can follow us along on social media. We’re very active on our Tik TOK, as well as our Instagram. and then Carmel, you probably want to get into exactly how to sign up.

Carmel Imani: our handle is @Imani.Law, and so people can, when, they go to our social media profile, we have a link where you can chat with us. We have a link that you can click on where you can book a consult with us so that we can give legal advice. Cause again, like you said, this is not legal advice that every business is so different, and we advise differently based on the type of profession the client has. we, definitely recommend scheduling that one on one call where we, really dive deep into your business and talk about all the things you need, contracts, and, the business structure you need as well as trademarks and all of that.