Many entrepreneurs
structure their business as a limited liability company (LLC). Given that LLCs offer the liability protection
of a corporation, without all of the administrative hassles, this business
entity might seem like the best of both worlds—and in many ways it can be.
However, things aren’t nearly as cut and dry as they might seem when it comes
to abiding by an LLC’s administrative formalities.
Although the
administrative requirements for an LLC are far less strict than for a
corporation, you’ll still need to abide by some operational formalities if you
want to maintain your personal liability protection. If you fail to adhere to
such formalities, a court could remove the protective barrier shielding your
personal assets, known as “piercing the veil,” leaving you personally liable to
creditors, in the event of a judgment.
While the formalities
required for LLCs vary by state, implementing and adhering to the following
five best practices can help ensure your company stays in compliance.
1. CONDUCT ALL BUSINESS IN THE COMPANY’S NAME
To make people aware that they’re dealing with an LLC and not an
individual, all business should be conducted in the company’s name, including
adding your chosen limited-liability abbreviation. This means using the company
letterhead on all correspondence, identifying your company on websites and
social media, naming the company as a party in all legal agreements, as well as
making all financial transactions in the company’s name, not your own.
2. KEEP A SEPARATE COMPANY BANK ACCOUNT, AND
NEVER MIX PERSONAL AND BUSINESS FUNDS
As soon as possible after filing your LLC formation documents and
getting your EIN, you should set up a bank account in the company’s name. This
account should be used for any and all company transactions, from making major
purchases from vendors to buying everyday office supplies. Additionally,
payments to the company should always be made to the company account, not a
personal account, and company funds should never be used to pay for personal
bills or purchases.
Commingling of personal and business assets is one of the main
reasons a court would “pierce the veil” of an LLC’s liability protection. With
this in mind, keeping your company’s finances separate from your own is of the
utmost importance, and we can help you put in place financial systems that will
make this a snap.
3. CREATE AN OPERATING AGREEMENT
Though most states don’t legally require LLCs to have an operating
agreement, it’s vital that you have one in place, even if you’re the sole
owner. An operating agreement provides the essential legal guidelines and
framework for how your company will be run, and it clearly establishes the
business as a separate legal entity.
Among other functions, an operating agreement details how the
ownership, responsibilities, and profits are divided among the LLC owners
(known as members); it establishes how the company will be managed; and it
outlines how the company is to be dissolved or sold. If you have partners,
negotiating your LLC operating agreement is an absolutely critical part of
creating a strong partnership relationship that can withstand the test of time
and potential conflicts.
We can support you in creating and maintaining a robust operating
agreement that suits the specific needs and circumstances of your particular
business.
4. FILE REGULAR REPORTS WITH THE STATE
Nearly all states require LLCs to file regular reports—generally
on an annual basis—with the state agency responsible for registering business
organizations. Such reports keep the governing agency apprised of your
company’s status, and they are sometimes called a “Statement of Information.”
Each state has different rules on how often and when a report
needs to be filed, what filing fees must be paid, and if other documents need
to be filed with the report to address key changes to your LLC. We have
processes that can help keep you up-to-date on your state’s latest reporting
processes and requirements to ensure your filings are always made on a timely
basis.
5. HOLD REGULAR MEMBER MEETINGS AND KEEP MINUTES
Although very few states legally require LLCs to hold member
meetings and keep minutes, doing so is important for a number of reasons. Most
importantly, holding regular meetings with accurate minutes provides strong
evidence that your LLC is serious about observing administrative formalities.
Such meetings offer extra protection if creditors ever seek to pierce your
corporate veil.
Outside of protecting your personal liability, holding regular
meetings and keeping detailed minutes just makes good business sense,
especially for multi-member LLCs. Holding regular meetings facilitates
consensus among members when making major decisions, keeps members informed of
business actions, and provides a forum to plan for your organization’s future.
Meeting minutes also provide a clear record of member discussions,
votes, and decisions, which can help reduce member disputes and conflict. Plus,
keeping detailed minutes provides solid documentation of the LLC’s internal
operations should the courts or IRS ever request such records.
ENLIST OUR SUPPORT
We can support and assist you with maintaining your LLC’s business
records and adhering to corporate formalities. In fact, we offer specially
designed maintenance packages to help ensure your LLC meets these requirements
and maintains the maximum level of liability protection for your personal
assets.
In addition to our maintenance packages, your business could also
benefit from our LIFT Personal Business Records Binder, which can not only be
used to keep your key business records in order, but it’s also a guide to keep
you from leaving anything important out. Armed with this resource, you can be
confident that you’ve got everything you need in one place, and it will make
all your financial and tax-related work go that much more smoothly.
Be sure to ask how you can get your LIFT Personal Business Records
Binder, and how you can best use it to keep all your most important documents
in order. Contact
us today to schedule your appointment.
This article is a service of Ganvir Law, Personal
Family Lawyer™. We offer a complete spectrum of legal services for businesses
and can help you make the wisest choices on how to deal with your business
throughout life and in the event of your death. We also offer a Business
Strategy Session for an ongoing business, which includes a review of all the
legal, financial, and tax systems you need for your business. Call us today to
schedule.