Common Oregon LLC Errors

We often meet with entrepreneurs and business owners who, on their own, have formed their Oregon company, but who have lingering questions. Since these clients ask similar questions, we figured an article answering the most common questions and addressing the most commonly missed issues would be helpful. The majority of companies in Oregon are LLCs, and many of the clients we meet who have formed a company on their own are single owner companies. Therefore, this article focuses on the questions that an owner of a single member Oregon LLC might have, and some of the typical errors and incorrect assumptions made by such new business owners.

1. What Incorporating Means

A common misconception is that filing Articles of Organization completes the formation of an LLC. It doesn’t. Filing Articles of Organization is merely the first step in completing the formation of a new company. From there, an owner should draft and sign the company’s initial internal corporate documents, which include an operating agreement and a consent, pursuant to which the owner agrees to the adoption of the operating agreement and ratifies all acts taken by the owner as part of the formation process.

The owner also should apply for an employer identification number (“EIN”) with the IRS, register any assumed business name(s) with the Oregon Secretary of State, and file a Combined Employer’s Registration with the State of Oregon if the company will have any employees, which would include the owner himself or herself if the company will be an LLC taxed as an S Corporation.

The owner may also need to register the LLC with a local taxing authority. For instance, in Portland every new business must register with the City of Portland / Multnomah County to comply with the City of Portland Business License Tax and the Multnomah County Business Income Tax. Many new business owners in Portland miss this step. Other jurisdictions in Oregon have personal property tax requirements. New business owners should check with their local taxing authority to ensure that the business is in full compliance with local tax obligations.

2. Independent Operations and Bank Accounts

Any new company must operate independently of its owner. That means the company should have its own financial books and legal records, and, of course, its own bank account under the company’s name. Before the most recent financial collapse, Oregon banks were more lenient about the information they required to open an account for a new company. These days they’re strict. Most Oregon banks will require that company ownership be disclosed online and be publicly accessible through the Oregon Secretary of State’s web site before an account can be opened.

Keeping the ownership of an Oregon LLC private by not listing the owner (also referred to as the member) of the company on the Articles of Organization may create the need for a subsequent filing with the Oregon Secretary of State’s office, as banks will require such ownership disclosure to open business accounts.

3. Annual Report

Once every year all LLCs in Oregon must file an annual report with the Oregon Secretary of State’s office. Many new business owners miss this annual report filing requirement, causing their companies to be administratively dissolved. Although LLC owners may reinstate the company within five years of being administratively dissolved, a $100 late fee penalty will be required to reinstate the company, and, during the period of dissolution, the owner of the company will no longer be protected by the limited liability protection of the LLC.

Moreover, and relating to the points raised in Section 2, at least one member or manager’s name must be listed on the annual report. So, sooner than later ownership will need to be publicly disclosed. As a result, even if a bank doesn’t require ownership to be publicly disclosed to open a business account, the Oregon Secretary of State’s filing requirements will likely force the owner’s hand at some point.

(On a related note, it’s a good idea for new business owners to develop a relationship with a business banker. The company may later need a bank loan or business line of credit, and a personal relationship with a banker can help to obtain financing.)

4. Accounting

New business owners also should establish a working relationship with a trustworthy business accountant and bookkeeper. We often meet with new business owners who either have no such relationships, or who have a relationship with an accountant they don’t like. Others understandably try to save money by managing the books and accounting on their own.

Single owner LLCs are by default disregarded entities, which means the company doesn’t actually pay income tax, and the owner instead reports all income on that owner’s Schedule C, which is filed with the owner’s personal tax return. That means that tax compliance is much easier than it would be if the company were taxed as a partnership, C Corporation, or S Corporation, but it doesn’t mean that managing the books or accounting on one’s own is necessarily a good idea.

At some point the company will grow (hopefully), and retaining a good accountant and bookkeeper at the outset to help manage the books and implement the right bookkeeping systems and practices will allow the business owner to avoid later unnecessary, and expensive, clean up work by professional bookkeepers and accountants.

5. Only Certain Professions Are Professionals

The standard form Articles of Organization for an Oregon LLC contains a section for licensed professional service providers to describe the services to be rendered under the new LLC. For the purpose of this section, a professional is defined as only the following: accountants, architects, attorneys, chiropractors, dentists, landscape architects, naturopaths, nurse practitioners, psychologists, physicians, medical imaging licensees, real estate appraisers, and, as a catch-all, “other persons providing to the public types of personal service or services substantially similar to those listed [above] … that may be lawfully rendered only pursuant to a license.” (ORS 58.015)

If a new LLC is owned by someone who renders one of these specific types of services, then he or she should describe the services in the Articles of Organization. For others who otherwise hold themselves out as professionals, but who do not fall under the definition of professional under the Oregon law cited above, they should be mindful not to indicate that they are a professional when completing the Articles of Organization.

6. Raising Money

Many new startups want to at least have the option to later raise money, if possible. LLCs are wonderful for their flexibility and simplicity. But, they’re generally not good tools to raise money, particularly from professional investors such as angel investors or venture capitalists. Those types of investors prefer C Corporations. That doesn’t mean that founders of LLCs won’t be able to raise money from professional investors, but, to do so, the company will likely have to be converted to a C Corporation first.

So, the lesson for founders of new LLCs is that, if the founder is serious about wanting to pursue professional investment money, the founder should seriously consider either converting the new company over to a C Corporation or, if the business is very young and has limited operating history, then simply relaunching a new iteration of the company as a C Corporation.