I
see it several times per day, everyday:
An LLC disaster waiting to happen!
No matter where I travel or with
whom I speak, it’s clear that small to
mid-sized business owners are not
getting proper instruction on how to
create, run, and maintain a ‘rock solid’
LLC. Did you or your attorney form
your LLC? Are you now left with a stack
of papers and confusion?
One comment that I repeatedly hear is,
“Well, my attorney set it up for me two
years ago…so everything is rock solid.”
Usually, without much probing, I soon
learn that little else has been done
since then. I will typically find that
even the attorney may have missed a few
steps along the way! In fact, we have
uncovered 24 mistakes/traps that LLC
owners face all the time! Many of these
mistakes are even made by attorneys,
experienced business owners, and very
talented people. So if you want to
avoid disasters and create a ‘rock
solid’ LLC…let’s get started!
While I can’t cover all 24 mistakes and
traps in this article, let’s talk about
the
first 5 mistakes in
some detail:
1)
THE ‘FATAL DEATH’ PERSONAL LIABILITY
CLAUSE –
A handful of states have a strange
option in their articles of organization
forms which can be
d-i-s-a-s-t-r-o-u-s. Some states
require the filer to select whether or
not LLC members will be
personally liable for the business
debts of the LLC. Obviously, members
should not be personally liable
for LLC debts and obligations! This
is the reason you are forming an LLC to
begin with…remember? Carefully read the
articles of organization or similar
formation documents in all states. Make
sure that you and your attorney do
not accept member personal
liability for business debts. If you
had an attorney or filing service submit
your organizing documents for you, then
it is always a good idea to ‘double
check’ this area. Make modifications if
needed. You would be surprised how many
times it’s a secretary, legal assistant
or clerk who actually completes your
precious articles of organization.
Just because a box exists, this does not
mean you should ‘checkmark’ it!
2)
NoT MAINTAINING ‘REQUIRED’ RECORDS –
Here is an area where much
confusion exists. When I talk about
required records, I almost always get
the same response, “I don’t want
to keep records…that’s why I chose the
LLC over a corporation!”
Hold on one minute…because
you may be surprised to learn that
almost every state requires the LLC to
maintain certain key records. In fact,
maintaining ‘key records’ is one of the
few ‘formalities’ that states do
impose on the LLC. As a result, this
can be a prime target area of attack if
a suing attorney, the IRS, or a
bankruptcy court wishes to ‘set aside’
or ‘penetrate’ the LLC.
We have reviewed this area in much
detail for all 50 states and D.C., and I
can tell you that each is different.
Regardless of what your attorney,
accountant, best friend, or local guru
tells you, this is a MUST DO
area! Some common records include:
copies of resolutions, unanimous consent
forms, copies of meeting minutes, tax
returns (from 3 to 6 years), the names
and addresses of all current and former
members and/or managers, a copy of the
operating agreement and more!
3)
FAILING TO UnDERSTAND and REVIEW YOUR
OPERATING AGREEMENT –
This is an all too common
mistake. The operating agreement is
perhaps the most important document
of the LLC! The operating agreement is
an ‘internal’ set of rules for the
company. It is basically a contract
among members of the LLC. Even if you
are the only LLC member this document is
very important! We continually find
that many business owners have a generic
operating agreement that has never been
reviewed or even signed by members!
Even worse, most operating agreements
are usually missing some KEY
components. In fact, we have isolated
43 to 45 key components that must be
included in almost all operating
agreements. Most canned and even
‘customized’ agreements only contain
about 25 to 30 of these components. At
a bare minimum, you should understand
what the ‘best practices’ are regarding
operating agreements and then compare
this ‘gold standard’ to what you have.
Special tax treatments for the LLC (such
as the popular S-corporation tax
treatment under Sub Chapter S) will
require additional terms and controls!
4)
Failing to Complete the ‘Big 10’ after
forming the LLC:
It does not matter whether you
file the LLC paperwork yourself, hire an
attorney or other service these things
must be completed. This is one mistake
we see over and over again! Most
business owners routinely forget to
complete the ‘Big 10’ important steps
within 30 days of forming the LLC. Here
are 7 of the steps:
a) Conduct the First Organizational Meeting
of the LLC
– This is really important and will
allow you to create solid safeguards and
‘often forgotten’ controls. There are
about 11 things that should occur at
this meeting!
b)
Obtain Employer’s Identification Number
(‘EIN’) from the IRS
c) Register Your Business Name with the
County Name Registrar
d)
Register with your State Department of
Revenue and Comply with State Sales Tax
Rules
e) Collect Member Capital Contributions and
Transfer Cash or Hard Assets into the
LLC
(With proper instruction this is
simple…if done incorrectly a liability
disaster can occur!)
f) Obtain the Proper Business Licenses
g) Review Insurance Coverage Needs and
Limitations
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