Easy ways to protect your business (and yourself) from threats to its liability
One of the most popular business structures chosen by new entrepreneurs is the limited liability company (LLC), and understandably so. The LLC gives your business an added level of professionalism over a sole proprietorship; potential clients and vendors could have the perception that yours is a more legitimate business and can be trusted. Unlike corporations, LLCs are relatively easy to manage when it comes to required reporting, filings, and taxation, which makes the LLC attractive to small businesses with just one member.
The most appealing feature of the LLC is what its name implies – protection of the members’ personal assets. If the company becomes insolvent or is sued, the members are not personally liable for damages, which would be the case in a sole proprietorship or partnership.
The appeal of the LLC can also be its downfall. If not properly managed, the veil of protection of your personal assets could be torn to shreds by the courts or the IRS. The last thing any business owner wants is to be sued or audited and told that their business assets – along with their personal ones – will be used to satisfy a debt or claim brought against him. Unfortunately, many entrepreneurs are in the dark when it comes to knowing how to maximize the protection and appeal of the LLC.
Here are 8 simple things you can do right now to ensure your business operations present your LLC in the best light – as a separate and distinguishable entity.
- Use “LLC” in your company name. When forming an LLC, most states require that you include either “LLC,” “Ltd.,” “Limited Liability Company,” or some other variation in your legal business name. For example: Acme Widgets, LLC. You don’t necessarily need to include the suffix in your logo or informal documents, but you should use the designation in any contracts, agreements, purchasing situations, banking, and any other legal or binding documents.
- Have an operating agreement. An operating agreement establishes the guiding regulations of your company – who the members are, how profits are distributed, voting rights, etc. If you don’t have one, your company is subject to whatever the state dictates for an LLC, which may not be what you want. Create an operating agreement, approve and sign it, then store it with your other records.
- Sign agreements as your business, not yourself. You should always consult with an attorney when it comes to legal matters, but I have made it a practice to sign contracts and other binding documents as the entity I represent, with an additional line for my personal name, title, and signature. This makes it clear that you are acting on behalf of the company and keeps the line of separation between you and the business intact.
- Keep Minutes. Yes, even if you’re a company of one, you need to hold and document an annual meeting (or other frequency per your operating agreement). This provides written proof that there is business planning and decision-making taking place. You should also document major financial, hiring or real estate decisions with resolutions.
- Create a record book. Think of this as your corporate records. It’s where you will store your initial articles of organization, your operating agreement, resolutions, minutes, and other important documents. This should be in hard copy – a simple 3-ring binder will do. Be sure to keep a digital copy as well for backup purposes.
- Keep the money separate. This is, by far, the biggest mistake small business owners make – particularly single-member LLCs. And this is one of the first things that an IRS agent can examine to determine if your LLC is actually operating as a separate entity. Your business should have its own tax ID number and bank account. These are not for your personal use. Pay yourself from your business via check or another method that can be recorded, and handle your personal matters from that money. Avoid swiping your business debit or credit card while you’re out shopping, unless you’re buying business supplies that will be tracked in your accounting software.
- Hire an accountant or use software. In keeping with #6 above, a best practice for any business structure is to keep updated and accurate books. Good bookkeeping habits make it easier to run financial reports, record income and expenses, and be ready for quarterly and annual tax filings. There are several cost effective cloud-based or installed solutions available.
- Properly work with independent contractors. As an LLC, you may opt to hire someone to help with your business operations, which is great. Just be sure that you don’t raise any red flags treating your independent contractors as employees. First, know the difference. This IRS article is a great reference. Secondly – document, document, document. Be sure to have a written agreement with each contractor, as well as a signed Form W-9 on file for tax purposes. And pay them by check or another traceable, documentable method.
These are just a few of the many ways you can establish and maintain your LLC as a separate entity and protect the limited liability that it offers. Don’t be intimidated by these things; just begin incorporating these practices in your business today to ensure strength of your entity tomorrow.
Do you currently have any of these or other practices in place in your LLC? If so, share how you keep your LLC legit in the comments below. If not, what can you start doing in your business today?