"I just read your column in my local newspaper regarding a client who thought he and some others had formed a limited liability company (LLC) only to find out they had never filed Articles of Organization. In California at least, I believe your conclusion as to what needs to be done is wrong. The California secretary of state's office will not allow you to file articles (or just about any other document for that matter) with a date earlier than the date you submit the document for filing. Therefore, the LLC will not be in existence in California until the articles are filed, and there is no way to have the formation be effective three years earlier.

California would deem the members of the purported LLC to be partners. From a tax standpoint, the clients would probably be OK as they reported and paid taxes on their K-1 income. It would be a problem, however, from a liability perspective. Rather than having the limited liability protection that an LLC provides to its members, each of the members would be deemed partners until the LLC is officially formed and would, therefore, have unlimited liability for the debts of the deemed partnership. A lawyer who forgets to file the articles for his client would probably have exposure for malpractice that would go beyond paying any penalties out of his pocket."

I am grateful to the California attorney who sent me the above response to my column on LLCs earlier this month, and of course he is absolutely correct, not only in California but quite a few other states where the same result would apply. The problem was that the LLC filers in my earlier column were "do it yourselfers" — they did not hire an attorney to help them set up their LLC. Or perhaps they used one of the many "do it yourself incorporation" services available on the Web and didn't follow the instructions carefully enough. Or perhaps they hired an attorney who prepared the documents, mailed them out for signature, and didn't follow up to make sure the documents were signed and returned so that he could make the appropriate filings on behalf of the LLC. Or perhaps this was a Delaware or Nevada LLC doing business in another state, and the principals moved from one state to another without filing a Certificate of Registration in the new state.

In any case, the result is not a good one — if you want your LLC or corporation to protect you against liability in the event of a lawsuit, you must — absolutely MUST — make the appropriate filings with your state secretary of state's office. While a number of states may let you "cure" the failure to file after the fact by paying a hefty penalty, many don't, and the outcome would be the same as in California — the LLC members would have unlimited personal liability for anything the LLC did during the "gap period" before it actually filed its Articles of Organization with the state.

Here are the rules, pure and simple, when setting up a corporation or LLC:

(1) The corporation or LLC must file paperwork with the state secretary of state's office, get a federal tax ID number from the IRS, and register for all state and local taxes in the same state where it will be doing business and is incorporated.

(2) When the corporation or LLC will be doing business in a different state from where it is incorporated, it must file paperwork with the state secretary of state's office in BOTH jurisdictions (the state where it is incorporated and the state where it is actually conducting business), get a federal tax ID number from the IRS, and register for state and local taxes in both jurisdictions (unless the state of incorporation is a "convenience" jurisdiction such as Delaware or Nevada which does not require corporations or LLCs to register for state and local taxes unless they are actually doing business there).

(3) When you have a corporation or LLC and you move from one state to another, you are required to file paperwork with the state secretary of state's office in both the old and the new jurisdictions, and register for state and local taxes in the new jurisdiction (you don't need to get a new federal tax ID number unless you have changed your entity type — for example, converted from a corporation into an LLC).

Miss any one of these important steps, and you're setting yourself up for some real compliance headaches down the road. If you're not sure exactly how and when to do this — please hire an attorney . He will get it right, and you can deduct his fees. If he doesn't get it right, you can sue him for malpractice. If you do it yourself and louse it up, you will have nobody to blame (or sue) but yourself.

Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

COPYRIGHT 2008 CLIFFORD R. ENNICO.

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