Congratulations! You have filed your bylaws, appointed a registered agent, paid the necessary fees, and you are the proud owner of your very own corporation!
Now is the time to make sure you maintain it.
You have probably chosen an LLC business structure for its tax and liability benefits, but your LLC cannot help you if it is too weak to stand up to control. In this article, we will go over some ways to ensure that your LLC remains strong enough to provide the protection it is intended for.
Why maintaining your LLC is so important
As a business structure, LLCs appeal especially to smaller businesses because they provide a company with legal protection with the tax benefits of a sole proprietorship or partnership.
Not quite sure what that means? Let’s take a closer look.
If you are a sole proprietor or a partnership, there is no legal separation between your business and your personal assets. This means that if you are sued by a customer or are unable to pay creditors, your personal assets – your savings, your pension accounts, even your home – may be seized to pay down debt. An LLC protects your personal assets by limiting business-related liabilities to only your company’s assets – hence the term “limited liability”.
On the other hand, if your business is a company, both your business and the money you pay are taxed – mainly your profits are taxed twice. Unlike companies, however, LLCs are not taxed. Instead, “money passes” to the owners’ personal tax returns (what is called “throughput taxation”), and the owners pay personal income tax on any profits.
The nuances of taxes and responsibilities vary, so it’s worth consulting a tax advisor and / or attorney about your particular situation. The important thing, however, is to understand that an LLC is a separate legal entity from its owners. Having an LLC is a good start, but maintaining it is just as important. In the event of a bankruptcy, tax audit or lawsuit, for example, you need to be able to prove to the courts or the IRS that you are treating your business as a formal business, not a personal slush fund.
If you can not prove that your LLC is a real business, you could lose the benefits it should provide. You will also lose these benefits if your LLC is dissolved, which can happen if you fail to submit your annual reports and pay the associated fees.
Fortunately, maintaining an LLC is not difficult. The following are some quick tips to ensure that your LLC stays in good condition.
Quick tips to start maintaining your LLC today
Registering your business as an LLC is an important first step in setting up your business – but it is not the only one. The following steps are not always legally required, so they are sometimes overlooked. However, they are essential to keep your LLC in good condition.
Even if your LLC is already formed, do these as soon as possible, preferably before you start working with clients or customers. Each of them contributes to the strength of your LLC and helps it keep up in the face of any challenges. Bonus: they are all good business practices that you should do anyway.
Create a separate bank account
Especially if you are an individual show (also known as a single member LLC) with a simple business model, e.g. Freelancing or consulting, it can be tempting to keep using your personal bank account for business purposes.
But while it is not technically illegal to mix your personal finances with those of your LLCs, it is not a good idea.
After all, the whole point of an LLC is to separate your personal assets from your business. If you mix your personal and business assets together, a court may decide that your LLC is not a separate legal entity after all. It puts you at risk of losing the liability protection that an LLC provides – and by extension, puts your personal assets at risk.
Separate bank accounts also simplify bookkeeping and compliance with taxes. If you have ever been audited, a separate and well-maintained business account will save you a lot of time and aggravation in your dealings with the IRS.
Fortunately, opening a business account is easy. Most banks and credit unions let you open one as soon as you have a company name and an EIN (you can immediately get an EIN from the IRS by applying for one online). Once created, treat your company’s bank account as if your job depends on it – because it does.
Here are a few tips for good business account maintenance:
Reimburse yourself for business expenses and save your receipts Record your transactions and be able to document the reason for the business purchase Do not use your business account to pay personal bills Do not withdraw cash for personal use Get a business credit card and use it only for business expenses
Create an LLC operating agreement
Some, but not all, states require LLCs to have an operating agreement, but whether it is required or not, it is a smart move, especially if you have gone into business with one or more people.
An operating agreement describes each member’s responsibilities, what assets each person contributed to the business, how ownership is structured, how money will be collected and distributed, what your process is for adding and removing members, and under what circumstances and how your business will be dissolved .
It serves three essential functions:
It clarifies and formalizes oral agreements between you and your partners so that there are no misunderstandings later; It allows you to set your own rules. Without it, your LLC will by default apply your state’s rules to governing LLCs, which are often vague and may not be appropriate for your business; It protects the limited liability status of your business by reinforcing that your business operates as an LLC, not a sole proprietorship or partnership.
Your operating agreement is a legally binding document, so it is a good investment to get the help of a lawyer to prepare it.
Establishment of licenses and permits
The exact requirements for licenses and permits you need for your business vary depending on your region and your industry, but it is your responsibility to know which ones you need, make sure you have them and keep them up to date.
You risk losing your LLC status if you do not have proper and valid licenses or permits, and you open yourself up to fines or even charges – so do not start working until you have everything you need!
Get your DBA
If you have formed your LLC but want to run a business under a different name, you must file a “trade as” (DBA), sometimes called a “fictitious name”.
For example, the owner of Agnes Johnson Media LLC may prefer to do business as “Blissful Wedding Photography”. However, if she operates her business under this name without registering for a DBA, she risks invalidating her LLC.
Fortunately, the process of registering a DBA is usually simple and inexpensive. The exact requirements vary, but in most cases you can find out what steps to take from the government agency where you registered your LLC. Do not forget that you need to renew your DBAs regularly (usually annually).
DBAs also allow you to run more than one business without applying for a brand new LLC. Assuming she had the right licenses and permits, for example, Agnes Johnson could e.g. Create “Blissful Wedding Cakes” and “Blissful Flower Arrangements” businesses by simply registering multiple DBAs.
Long-term strategies for maintaining your LLC
Going forward, you need to maintain regularly to keep your LLC in good condition. These are ongoing tasks that help keep your LLC in good condition and ensure that it is neither dissolved by carelessness nor weakened to the point that it is useless.
Submit your annual report
If you have just created your LLC, you do not need to submit an annual report for at least a year – but now is the time to make sure it is in the calendar.
Most states require LLCs to submit an annual report, sometimes referred to as a disclosure statement (SOI). A handful of states only require your SOI every two years, and if you are registered in Pennsylvania, you may only need to file once every ten years.
Annually or not, your report is submitted to your Secretary of State. This can usually be done online, but the cost and exact requirements for filing vary from state to state. Some states send reminders before your report is paid, but ultimately it is your responsibility to make sure it is filed. If you miss the deadline, you may have to pay a late fee.
Miss it too much and your LLC may dissolve automatically.
If you hired a company to form your LLC, check if they send your report to you (and ask how much they will charge) or if you should do it yourself. Either way, right now as you think about it, figure out when your next report should be paid, and put the date in your calendar to make sure it gets filed on time.
It sounds very formal and scary, but your annual report is not like a letter to shareholders describing everything your company has done in the past year. It really is just an opportunity to confirm or update the following:
Your main business address Names and addresses of your members and managers Important identification numbers for your company, e.g. Your state unit number Purpose of your business A list of authorized signatories Your registered agent’s information
So do not sweat it – just make sure it gets done!
Keep detailed records – and save them where you can find them
Again, keeping minutes and other business records is not a legal requirement, but it is a good way to protect yourself.
Remember that in the event of a lawsuit, bankruptcy or any other situation where your company’s assets may be at risk, it is important to be able to prove that your LLC is a separate entity from you personally – ie. that it is a real business, not just a tax hole. Regular record keeping strengthens your personal liability protection in the event of a lawsuit by showing that you treat your company as the company it is.
Detailed, comprehensive accounts also make it easier to handle taxes and will be necessary if you ever need a loan for your business.
You should save copies of the following at your place of business as well as back them up in the cloud so you can quickly and easily get your hands on them:
LLC organizational articlesLC operating agreement A list of all the members of your LLC as well as their addresses, contributions and shares EIN confirmation letter Meeting minutes or other records as required in the operating agreement All accounts and tax registers All company licenses and permits
Pay your taxes
As mentioned above, in the case of most public limited companies, it is the owners, not the company itself, who pay tax.
That said, there are many variables, depending on whether you are a single or multi-member LLC, how your operating agreement is set up, whether you are liable for payroll tax, if you sell taxable goods and services, and where you are located.
Paying your taxes in full and on time can help keep your LLC in good standing as well as keep you out of trouble with the IRS. It is worth consulting a qualified tax expert to make sure you meet your obligations. This person can also help you take advantage of any tax deductions or credits that your LLC is entitled to.
By taking the necessary steps to ensure that your LLC status is maintained, you get the opportunity to focus on running your business without having to worry about the possibility of losing the liability and tax benefits you have signed up for.
Remember, the requirements vary from state to state and company to company. It is smart to consult a qualified business lawyer when you have questions or need guidance. Crazy Egg has a guide to online legal services that can help you save money compared to traditional lawyers.
You can also find our guides to the best business insurances and the best business credit cards useful.
Now you need to build your business!