Limited liability companies (LLCs) are a good choice for a lot of small businesses. Having an LLC can protect your personal assets from business liabilities. But, forming your LLC is only the first step for protecting your assets. You need to keep your business and personal accounts completely separate. You also need an operating agreement.
What is an LLC?
LLC stands for limited liability company. An LLC is formed at the state level by filing Articles of Organization or similar formation document. Articles of Organization is the document filed with your state’s Secretary of State office. If you want step-by-step instructions on how to start an LLC (without a lawyer), check out this guide to DIYing your LLC.
Most people start LLCs is for the liability protection. Which is an awesome benefit! If you get sued, you don’t want them going after your house. Though it’s not super common to be sued, it never hurts to be prepared. If you aren’t sure if you’re ready for an LLC, check out this post to help you decide.
An LLC has to maintain certain formalities to preserve its limited liability protection. It must operate as completely separate from its owners. An operating agreement is one of those formalities. You may think since you’re a single member LLC, you don’t need an agreement. But, having a written operating agreement-that you follow-shows you intend the business to be separate from you.
Piercing the corporate veil
When it comes to corporate law, the focus is on protecting consumers. Which we can appreciate as consumers. But, as business owners, we have to look at it a little differently. Usually when an LLC is sued, the member(s)/owner(s) will get sued too. Since only business assets are protected by the company, there may not be enough to cover the damages. So, they will also sue you. That’s what the LLC is for. To protect your personal assets.
There’s a concept in the law called “piercing the corporate veil”. When a company is so closely related to its owner(s), then your personal assets may be at risk.
There are many factors to consider when determining if an LLC is truly separate from its members (and it’s obvious in cases of fraud, etc.), but the corporate veil can also be pierced by failing to follow business formalities.
Some things include: not keeping business and personal funds completely separate, not presenting your business as an LLC to the public, and not keeping records.
LLC Operating Agreement
One of these formalities, and one of the biggest mistakes I see LLCs (especially single member LLCs) make, is not having a written operating agreement. An operating agreement is essentially the contract that governs the management of an LLC. It is not required in most states. And, I don’t think any states requires filing it with the state. But, it is a very important document that every LLC should have. Even single member LLCs.
There’re no exact requirements for an LLC Operating Agreement. It needs to be signed by all the members and dated. It should also include things like:
1. Basic information about the company including name and date of formation.
You get this information from the Articles of Organization
2. Statement that formation document has been filed
3. State it was formed in
4. The purpose of the company
The purpose of the company can be narrow (to run a blog), but it can also be very broad. Common language is “for all lawful purposes”. By including broad language, you are not limiting the business activities of the LLC.
5. The duration of the company
The duration can either be for a designated amount of time or until its dissolved. Most companies go on until they’re dissolved.
Some people start LLCs to perform a very specific transaction or objective that will be done within a certain amount of time. They don’t want to be linked to each other after the event takes place.
6. Principal place of business
This is where all LLC records will be stored. This isn’t a public document, so if you do business from your home you can list that address.
7. Capital contributions
Capital contributions are money, or services, put into the business. How much is everyone putting in? Can/will more be required? Do you earn interest? Will capital investments be returned?
Even if you’re starting the business yourself, you should make some amount of capital contribution. It doesn’t have to be a lot, but you do need to make
8. Profit & losses shared
How will each member share in the profits & losses? Obviously, for single member LLCs, the single member will have 100% of the profits & 100% of the losses. If there is more than one member, each member will be responsible for a certain percentage.
LLCs are great for small businesses.
But, you have to make sure you’re doing the right things to maintain your limited liability status and protect your personal assets.
One of the easiest things you can do is have an LLC operating agreement. You may be able to put together your own. Just make sure it includes everything it should. If you would rather purchase a template to customize for your LLC, I have a single-member, member managed LLC template in my shop.
Disclaimer: This site, and all information contained herein or through communication with me, is intended as legal information only. I am an attorney, but I am not your attorney, so nothing on this site, nor any communication with me, shall create an attorney-client relationship. I am not liable for damages or losses based on any action taken, or inaction, based on the information contained on this site. All areas of the law are fact specific and there is no substitute for legal advice from an attorney licensed in your jurisdiction who is familiar with the specific facts and circumstances of your situation.