Congratulations! You’ve filed your articles of organization, appointed a registered agent, paid the required fees, and you’re the proud owner of your very own limited liability company!
Now it’s time to make sure you maintain it.
You probably chose an LLC business structure for its tax and liability benefits, but your LLC can’t help you if it’s too weak to stand up to scrutiny. In this article, we’ll go over some ways to ensure your LLC stays strong enough to provide the protection it’s meant to.
Why Maintaining Your LLC Is So Important
As a business structure, LLCs are particularly appealing to smaller companies because they confer the legal protections of a corporation with the tax advantages of a sole proprietorship or a partnership.
Not sure exactly what that means? Let’s have a closer look.
If you’re a sole proprietor or a partnership, there’s no legal separation between your business and your personal assets. That means that if you’re sued by a customer or unable to pay creditors, your personal assets—your savings, your retirement accounts, even your home—could potentially be seized to pay off debts. An LLC protects your personal assets by limiting business-related liabilities to only your business’s assets—hence the term “limited liability.”
On the other hand, if your company is a corporation, both your business and the money you pay yourself are taxed—essentially, your profits are taxed twice. Unlike corporations, however, LLCs aren’t taxed. Instead, money “passes through” to the owners’ personal tax returns (what’s known as “pass-through taxation”), and the owners pay personal income tax on any profits.
The nuances of taxes and liability vary, so it’s worth consulting a tax advisory and/or lawyer about your particular situation. The important thing to understand, though, is that an LLC is a separate legal entity from its owners. Having an LLC is a good start, but it’s equally important to maintain it. In the event of a bankruptcy, a tax audit, or a lawsuit, for example, you need to be able to prove to the courts or the IRS that you treat your company as a formal business, not a personal slush fund.
If you can’t show evidence that your LLC is a real business, you could lose the very benefits it’s supposed to confer. You’ll also lose those benefits if your LLC is dissolved, which can happen if you fail to file your annual reports and pay the related fees.
Fortunately, maintaining an LLC isn’t difficult. Following are some quick tips for making sure your LLC stays in good standing.
Quick Tips To Start Maintaining Your LLC Today
Registering your business as an LLC is a vital first step to setting up your business—but it’s not the only one. The following steps aren’t always legally required so they’re sometimes overlooked. However, they’re essential to keeping your LLC in good standing.
Even if your LLC is already formed, do these as soon as you can, ideally before you start working with clients or customers. Each of them contributes to the strength of your LLC and will help it hold up in the face of any challenges. Bonus: they’re all good business practices that you should do anyway.
Set Up a Separate Bank Account
Especially if you’re a one-person show (a.k.a, a single-member LLC) with a simple business model, such as freelancing or consulting, it can be tempting to keep using your personal bank account for company purposes.
But while it’s not technically illegal to blend your personal finances with your LLC’s, it’s not a good idea.
The whole point of an LLC, after all, is to separate your personal assets from your business. If you co-mingle your personal and business funds, a court could decide that your LLC isn’t a separate legal entity after all. That puts you at risk of losing the liability protection that an LLC affords—and by extension, puts your personal assets at risk.
Separate bank accounts also simplify recordkeeping and tax compliance. If you’re ever 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 will let you open one as soon as you have a business name and an EIN (you can get an EIN from the IRS immediately by filing for one online). Once it’s set up, treat your business bank account like your job depends on it—because it kind of does.
Here are a few tips for good business account maintenance:
- Reimburse yourself for business expenses and keep your receipts
- Record your transactions and be able to document the reason for business purchases
- Don’t use your business account to pay personal bills
- Don’t 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’s required or not, it’s a smart move, especially if you’ve gone into business with one or more people.
An operating agreement lays out each member’s responsibilities, what assets each person contributed to the business, how ownership is structured, how money will be raised and distributed, what your process is for adding and removing members, and under what circumstances and how your company will be dissolved.
It serves three essential functions:
- It clarifies and formalizes verbal agreements between you and your partners so there aren’t misunderstandings later;
- It allows you to set your own rules. Without it, your LLC will default to your state’s rules for governing LLCs, which are often vague and may not be appropriate for your company;
- It protects your company’s limited liability status by reinforcing that your business is operating as an LLC, not a sole proprietorship or partnership.
Your operating agreement is a legally binding document, so getting a lawyer’s help in drawing it up is a good investment.
Line Up Licenses and Permits
The exact requirement for licenses and permits that you need for your business will vary depending on your region and your industry, but it’s 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 don’t have correct and valid licenses or permits, and you open yourself up to fines or even legal charges—so don’t start working until you have everything you need in place!
Get Your DBA
If you’ve formed your LLC but want to conduct business under another name, you’ll need to file a “doing business as” (DBA), sometimes called a “fictitious name.”
For example, the owner of Agnes Johnson Media LLC might prefer to do business as “Blissful Wedding Photography.” If she conducts her business under that name without registering for a DBA, however, she risks invalidating her LLC.
Fortunately, the process to register a DBA is usually simple and inexpensive. The exact requirements vary, but in most cases, you can find out what steps you need to take from the state agency where you registered your LLC. Don’t forget that you’ll have to renew your DBAs regularly (usually annually).
DBAs also allow you to run more than one business without filing for a whole new LLC. Assuming she had the right licenses and permits, for example, Agnes Johnson could create “Blissful Wedding Cakes” and “Blissful Flower Arrangements” companies simply by registering more DBAs.
Long-Term Strategies for Maintaining Your LLC
Moving forward, you’ll need to do some regular maintenance to keep your LLC in good standing. These are ongoing tasks that help keep your LLC in good standing and ensure that it’s neither dissolved through carelessness nor weakened to the point that it’s useless.
File Your Annual Report
If you’ve just created your LLC, you won’t need to file an annual report for at least a year—but now is the time to make sure it’s on the calendar.
Most states require that LLCs file an annual report, sometimes referred to as a statement of information (SOI). A handful of states require your SOI only every two years, and if you’re registered in Pennsylvania, you may only need to file once every 10 years.
Annual or not, your report is filed with your Secretary of State. It 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 due, but ultimately, it’s your responsibility to be sure it gets filed. If you miss the deadline, you may have to pay a late fee.
Miss it by too much, and your LLC may be automatically dissolved.
If you hired a company to form your LLC, verify if they’ll file your report for you (and ask how much they’ll charge) or if you’ll need to do it yourself. Either way, right now, while you’re thinking about it, find out when your next report is due and put the date on your calendar to ensure it gets filed on time.
It sounds very formal and intimidating, but your annual report isn’t like a letter to shareholders detailing everything your business has done in the past year. It’s really just an opportunity to confirm or update the following:
- Your principal business address
- The names and addresses of your members and managers
- Important identification numbers for your business, such as your state entity number
- The purpose of your business
- A list of authorized signatories
- Your registered agent’s information
So don’t sweat it—just make sure it gets done!
Maintain Detailed Records—and Keep Them Where You Can Find Them
Once again, keeping minutes and other company records isn’t a legal requirement, but it’s a good way to protect yourself.
Remember that in the event of a lawsuit, bankruptcy, or any other situation in which your company assets may be at risk, it’s important to be able to prove that your LLC is a separate entity from you personally—i.e., that it’s a real business, not just a tax loophole. Regular record keeping strengthens your personal liability protection in the event of a lawsuit by showing that you treat your company like the business it is.
Detailed, comprehensive financial records also make dealing with taxes easier and will be necessary if you ever need a loan for your business.
You should keep copies of the following at your place of business, as well as backed up in the cloud so that you can put your hands on them quickly and easily:
- LLC articles of organization
- LLC 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 by the operating agreement
- All financial statements and tax records
- All business licenses and permits
Pay Your Taxes
As mentioned above, in the case of most limited liability companies, it’s the owners, not the company itself, that pay taxes.
That said, there are a lot of variables, depending on whether you’re a single- or multi-member LLC, how your operating agreement is set up, whether you’re responsible for payroll tax, if you sell taxable goods and services, and where you’re 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’s worth consulting with a qualified tax professional to make sure you’re meeting your obligations. That person can also help you take advantage of any tax deductions or credits that your LLC is eligible for.
Taking the necessary steps to ensure that your LLC status is being maintained frees you up to focus on running your business without having to worry about the possibility of losing the liability and tax advantages you signed up for.
Remember, requirements vary from state to state and company to company. It’s smart to consult a qualified business lawyer anytime you have questions or need some guidance. Crazy Egg has a guide to online legal services that can help save you money over traditional attorneys.
Now go build your business!