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Congratulations -- you've formed a limited liability company (LLC)! Running your business as an LLC gives you limited liability for business debts (like a corporation) but allows you to avoid some of the legal formalities and tax rules that apply to corporations. It's one of the most flexible -- and efficient -- ways small business owners can structure their business.
To get your LLC up and running, you've already had to complete some essential start-up tasks: preparing and filing articles of organization (called a "certificate of organization" in some states) and preparing and signing an LLC operating agreement. Once
these documents are completed and the initial membership interests are sold to the founders
and initial investors, you may be tempted to forego any further formalities and get back to doing what you do best -- running the day-to-day business.
You can't simply keep running your business exactly as you did before you formed an LLC,
however. There are a few new formalities and paperwork requirements you should observe to keep proper records of important LLC decisions, transactions, and meetings. This will protect your LLC status and keep members, managers, and others apprised of the LLC's activities.
This book will help you take care of these formalities, quickly and easily. It provides all of the forms and advice you'll need to:
Why You Should Record Key LLC Decisions
- hold and document LLC managers' and members' meetings
- document actions taken by managers and members without having met, and
- approve common ongoing LLC legal, tax, and business decisions.
If you don'ttake the time to properly memorialize important decisions and meetings, you
could run into trouble. You can lose crucial tax benefits if you fail to properly document and
support important tax decisions and elections. Even worse, ignoring the legal technicalities
of running your LLC may jeopardize its legal existence as a separate business entity, which
means that you could be held personally liable for LLC debts. And, of course, as time passes
and memories fade, the reasons important LLC decisions were made, and the extent of each
member's or manager's participation in these decisions, may be forgotten. This can lead to
controversy and dissension, even in the ranks of a closely held LLC, unless you use written
minutes, consent forms, and resolutions to keep track of all important LLC decisions and votes.
Here are some reasons why you should record important LLC decisions:
- Annual LLC meetings may be required under your state law. If you fail to pay at least minimal attention to this and other ongoing legal formalities, you may lose the protection of your LLC limited liability status. If this happens, LLC members can be held personally liable for the debts of the LLC.
- The paperwork you create will provide a record of important LLC transactions. This "paper trail" can be important if disputes arise. It will show your managers, members, creditors, and suppliers, as well as the IRS and the courts, that you acted appropriately and in compliance with legal requirements.
- Formally documenting key LLC actions is a sure-fire way to keep all members informed of major LLC decisions, particularly those who don't manage the business day to day.
- Owners of small LLCs commonly approve business transactions in which they have personal, material, or financial interests. Your minutes or consent forms can help prevent legal problems by proving that these "self-interested" decisions were arrived at fairly, after careful consideration of the issues and full disclosure to the disinterested owners.
- Institutions like banks, trust companies, escrow companies, title companies, and property management companies may refuse to do business with your LLC unless you submit a copy of a manager or membership resolution approving the transaction in question. If you want to take
out a loan or purchase or rent property, for example, you may have to provide a resolution authorizing the transaction.
You don't need to document routine business decisions -- only those that require formal
manager or membership approval. In other words, you don't have to clutter up your LLC records binder (see Chapter 1) with records of decisions to purchase supplies or products, maintain or improve services or products, or other day-to-day issues.
However, key legal, tax, and financial decisions absolutely should be acted on and recorded by your managers and/or members. For example, you'll want to keep records of:
- the proceedings of annual meetings of managers and/or members
- the admission of a new member by the LLC
- the buyback of an existing membership interest by the LLC
- the purchase of real estate
- the authorization of a significant loan or substantial line of credit, and
- important federal or state tax elections.
These and other important decisions should be made by your managers and/or members and backed with legal paperwork. That way, you'll have solid documentation if key decisions are questioned or reviewed later by managers, members, creditors, the courts, or the IRS.Who Should Use This Book
Although all LLCs should formally record important decisions, some may need more help than this book provides. This book is for smaller LLCs -- those that are privately owned and have a manageable number of members (up to about 35) and employees (up to about 50) -- whose members and managers can work together without a great deal of controversy. A typical example is a family-owned LLC or an LLC that is owned by several people.
If your LLC is larger and/or sells membership interests to the public, you will have to contend with a wider variety of viewpoints -- and may not be able to count on the cooperation of all members in making or documenting decisions. Similarly, if a significant number of your LLC's members don't participate in the day-to-day management of the business, you'll need to use procedures that keep these members informed of LLC actions. The procedures described in
this book won't be sufficient for LLCs that have to contend with a lot of disagreement among
members or have to spend significant time and energy apprising far-flung, uninvolved members
of the LLC's activities.
Managers and Members in a Small LLC
In every business, someone must be responsible for managing the day-to-day affairs of the
company, and the LLC is no exception. There are two types of LLC management structures. In a member-managed LLC, all members are responsible for managing the business; most small LLCs take this form. In a manager-managed LLC, the business is managed by just some (not all) of its members, or is managed by one or more managers who is not an LLC member.
This book refers to "managers' meetings" and "members' meetings." However, if your LLC is member-managed, then you don't have to hold separate managers' meetings to approve LLC decisions -- a members' meeting will do. If your LLC is manager-managed, then you should hold separate managers' and members' meetings to approve important LLC decisions. After all, you want to make sure that all owners (all members) agree with the important decisions made by the management team.
How To Use This Book
This book explains, step by step, how to document important LLC decisions, votes, and transactions. You'll learn how to hold meetings and create the minutes, written consent forms,
resolutions, and promissory notes necessary to record LLC business.
You can handle most of this routine paperwork yourself, using the forms and instructions in this book. And, as explained in Chapter 2, LLC owners don't necessarily have to get together in person every time you have to make an important decision -- you may also be able to approve LLC business through written consents or minutes. (The methods you can use depend on your state's law -- see Appendix B for state-by-state LLC rules.) The information in this book will help you decide which approval method to use and how to prepare the necessary records.
The paperwork you'll need to complete consists of minutes and written consent forms for members and managers, together with resolution forms that are inserted into the minutes or consent forms to show approval of various types of LLC actions. To help you complete these forms, you'll find detailed instructions and samples in each chapter. All of the forms are included in Appendix C and on the CD-ROM accompanying this book.
However, you won't have to read the whole book cover to cover to get the information and forms you need. Start by reading Chapters 1 and 2, which explain some basics about LLCs and the options you have for making decisions. Armed with this information, you can decide whether to document the particular decision you're facing by (1) holding an actual meeting of your members and/or managers, (2) preparing minutes for a meeting that doesn't actually occur (called a "paper meeting"), or (3) obtaining the written consent of your members and/or managers to the action or decision at hand.