Many entrepreneurs structure their business as a limited liability company (LLC), because like corporations, LLCs offer personal liability protection for their owners. But unlike corporations, LLCs are not legally required to adhere to many of the same corporate formalities required of corporations.
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.
"A failure to adhere to LLC operational formalities could cause a court to 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."
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 Employer Identification Number (EIN), you should set up a bank account in the company’s name. This account should be used for 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. Cruz Law can support you in creating and maintaining a robust operating agreement that suits the specific needs and circumstances of your particular business.
And 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.
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. Cruz Law has processes that can help keep you up-to-date on Alaska'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. Combined with your operating agreement, regular reports to the state, and diligent separation of personal and business finances, 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 Cruz Law's Support
As your Family Business Lawyer®, Blyss Cruz can support and assist you with maintaining your LLC’s business records and adhering to corporate formalities, including holding meetings and keeping minutes. In fact, she offers 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 Cruz Law's maintenance packages, your business could also benefit from our LIFT Personal Business Records Binder, which can be used to keep your key business records in order, and it can serve as 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 Cruz Law today at (907) 313-9796 to schedule your appointment.
This article is a service of Blyss Cruz, Family Business Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.