April 10, 2015
With the continuing popularity of limited liability companies as the business entity of choice, the need to stay educated about their requirements continues to be a hot topic. Most people register their company with the Secretary of State, draft a one page operating agreement, and toss the two items on a shelf thinking they are now protected. However, to ensure you are actually protected if troubles arise in the future of the business, there are several areas that require more attention.
All limited liability companies need an operating agreement, but what does this mean? An operating agreement is the document that governs how the company is to be owned and managed. Are you the sole owner? It doesn’t matter; a fully protected LLC will have a detailed operating agreement no matter the number of owners. Typical subjects covered in an operating agreement include: who can own interests; who can manage the company; what are the respective rights and duties of owners and managers; how is the company valued; and how do owners sell or transfer their interests.
In addition to an operating agreement that complies with state laws and meets not only the current needs of the company, but is set to stay relevant as the company evolves, each LLC should issue membership interests. When interests are issued, it is imperative for the company to maintain an interest ledger tracking the percentages of ownership. Additionally, when determining ownership interests, it is crucial to ensure that all loans and capital contributions are properly tracked and all relevant documentation maintained by the company.
Speaking of money:
Every LLC should maintain its own bank account. Again, it doesn’t matter if the LLC has one owner or 15; all funds generated by the company should flow into the company bank account, and then be paid to employees and owners as provided for in the operating agreement. The company’s assets should be protected by obtaining the appropriate insurance coverage for the business.
Finally, all major business events should be documented through company minutes. The subject matter, timing and frequency of minutes required will vary for each business, and again, differ depending on what is required in the operating agreement. However, at the very minimum, every limited liability company should have annual minutes in conjunction with their annual reports.
Obviously, every business is different and the issues facing one LLC will not be the same as the issues facing others. There are several other matters that are of common concern for LLCs: intellectual property; dealings with members or managers; property ownership; and multiple state operations are just a few. Taking some time to consult with an attorney to ensure that these matters, including any others you may face, are addressed up front can go a long way to prevent time consuming and costly problems in the future.