LLCs are easy to maintain, but you have to remember to do it.
If you’ve already read last week’s blog post, you’ll know that there are many benefits to forming an LLC (Limited Liability Company), not least of which is protecting your personal assets.
An LLC forms a kind of wall between your business and yourself, meaning that if your business is ever sued, your personal assets (your car, house, boat, etc.) become out of reach to creditors.
So congratulations if you’ve already taken that step to protect yourself—but you’re not done yet! Make sure you follow the steps in this post as a map to maintaining your LLC, or risk destroying the protection it gives you.
1. LLC Operating Agreement
One of the very first steps you should take after you’ve formed your LLC is to put your Operating Agreement together. The Operating Agreement is a document that sets out how your LLC will function (including its finances). It should also indicate how much of the LLC each member owns. For example, if it’s just 1 member (you), you would put in your operating agreement that you own 100% of the LLC. If you have multiple members, you’re welcome to divvy up ownership however you and your members see fit.
In addition to indicating division of ownership among members, your Operating Agreement should also stipulate how profits are distributed to the members and how your taxes are paid (for some information on LLCs and tax election, see this blog post).
There are 5 main things you need to include in your agreement:
- the date your LLC was formed;
- the address and name of the Registered Agent and Registered Office;
- the purpose of the LLC;
- names and addresses of the LLC’s members; and
- the division of ownership of the LLC among members.
Your Operating Agreement is important, and you should keep a copy with all of your other business documents (like your formation documents), but thankfully, you don’t need to send it to your state or to the IRS. The only entities that might ask to see your agreement could be the bank (when opening your LLC’s bank account(s)), accountants, lawyers, those involved when or if you purchase real estate, or anyone you decide to partner or start a new business venture with.
If you need to make small, simple changes to your agreement, you can amend the original agreement (for example, if one of your members changes their name). If there’s a big change that needs to be made, it’s best to consult a lawyer before doing so.
2. Create separate bank accounts for your LLC
You probably formed an LLC to protect yourself and your assets (smart choice!). But if you are using your personal accounts for LLC finances, you’re putting yourself at risk. Remember that the LLC is there to form a wall between your business and you. If there is no division of accounts, your personal bank accounts aren’t fully protected should your business be sued.
One of the first steps you should take to uphold the strength of your LLC protection is to immediately separate your bank accounts and have dedicated ones for your LLC.
To be more specific, there are 3 main reasons to open dedicated bank accounts for your LLC:
- Liability: as mentioned above, if you are using personal accounts for your LLC, the court legally may not see a division between you and your business. It allows creditors to come after those accounts and hold you personally liable.
- Taxes: keeping a separate bank account for your LLC makes tax time much simpler. It becomes an easy way to keep a record of your business’s income and expenses.
- Appearance: using business accounts helps your business maintain a professional and authoritative image.
So, if you haven’t already, open one now.
3. LLC Annual Report
Proper maintenance of your LLC requires you to file an Annual Report with your state. There is a filing fee, but the fee is dependent upon which state you operate out of. They can range anywhere from $9 to $800.
Since different states have different rules about how often to file this report, it may take on other names. For example, some states require the report to be filed every 10 years, so they might call it a “Decennial Report”. Other names might include “Statement of Information”, "Periodic Report”, and a number of other variations.
Your LLC’s Annual Report helps to keep the LLC in good standing and assists in keeping your state up to date with your LLC’s contact information.
If you’re late filing your report, you’ll likely be charged a late fee, and if you forget to file it altogether, your state will dissolve your LLC.
Luckily, you don’t have to create your Annual Report from scratch. You should be able to find the appropriate forms on your state government’s website.
This step is easy and quick, but ignoring (or forgetting) this step could have serious consequences. Set a reminder in your calendar to complete it!
Remember that when you make decisions as an LLC, consent of your LLC’s members is required. For example, should you wish to change the name of the LLC, you should put a document together that states who is consenting and exactly what they are consenting to:
We, the undersigned, being all of the members of ABC Company LLC (the “Company”), a limited liability company, hereby consent to the following actions of the Company as of May 10, 2021:
1. The name of the Company is now 123 LLC.
2. The President of the Company is authorized to take all actions necessary to effectuate such name change, including amending the Operating Agreement, filing the appropriate documentation with the State, and any other necessary and proper actions.
The document should be signed and dated by all consenting members.
Consents are required for all major decisions, such as taking out a loan and sometimes even opening a bank account.
This is essential so that you have a record of all changes and confirmation that all major decisions for your LLC were consented to in writing.
5. Proper Accounting
Even if you are a single-member LLC, it’s a good idea to hire an accounting professional. Certified Professional Accountants (CPAs) are easy to find with a quick search on google.
A competent accountant will ensure that your LLC’s finances (and taxes) are being handled properly. With so many transactions happening and receipts piling up, proper accounting can get confusing, so it’s best to leave it to the professionals.
A CPA will know that LLCs are unique when it comes to income taxes. LLCs are a pass-through entity, meaning that income passes through to the members of the LLC and the LLC itself does not pay taxes.
If accounting is not taken care of the right way, you could lose your LLC's liability protection. The wall that the LLC is supposed to create between you and your business can start to have holes and cracks, and your personal assets may no longer be protected.
To sum up, the basic things you need to remember to maintain your LLC are:
- an Operating Agreement;
- separate bank accounts for the LLC;
- filing your Annual Report;
- consents; and
- proper accounting.
There are a number of other ways you can protect your business and assets, and you can check out 5 of them in the free masterclass “5 Steps to Legally Protect & Grow Your Online Business”!
For other ways to protect your money and business, watch the free masterclass: How to Legally Protect & Grow Your Online Business So You Can Keep More of the Money You Make