R-E-S-P-E-C-T the LLC
Utah’s Revised Uniform Limited Liability Company Act (the Act) grants strong protections to you as a member of a limited liability company against personal liability. However, you still need to follow the rules. This guide briefly touches on some essential requirements members need to heed.
Founders' Agreement is a MustThis Agreement is not required by statute but is so important we include it here. Most start-ups will not exist three years after they begin. There are many reasons for failure. At or near the top of the list is discord among the founders. Possibly, the founding members of the company do not share identical expectations of one another and have differing ideas as to who is responsible for what. One member might think he is doing this venture only part-time until it gets on its feet. Another might think all the partners will be putting in equal amounts of money. Another might plan on putting in sweat equity only.
You get the idea. Unless the founders know and honor the expectations there will inevitably be disagreement and contention that might very well sink the ship before it gets much beyond the harbor. The best thing these founding members can do right up front is draft an agreement that outlines all of the expectations and obligations they have for themselves and each other.
This preformation agreement is often referred to as the Founders' Agreement. It is a contract the initial members of the LLC assent to. It touches on things such as: cash vs. in-kind contributions, division of equity, part-time vs. full-time participation, who manages operations, tax-matters, marketing & sales, how will initial capital be raised, and more. The Founders' Agreement can later become in whole or part, the LLC's Operating Agreement. Every serious business person considering an LLC should have a Founders' Agreement. Even a single-member LLC owner is smart to have one.
Not on My Account- Treat the Business as its own PersonNot many startups can immediately generate cash-flow to adequately fund the business. Usually, members are required to make capital contributions to get the company up and running. Its important to have and follow a process for financing the entity. The LLC must have its own bank account. Money flowing in to this account from the members is classified as either a capital contribution or a loan. The temptation is to use the money in the operating account as if it were the member's personal bank account. It's not! The money is for business purposes ONLY, not for personal expenditures.
The LLC is a distinct and separate entity - a legal "person". Treat it as such. Money contributed cannot be pulled back on a whim. A "paper trail" of income and outflows should be accurately maintained and kept current. Use a bookkeeping software and/or an outside service. We know of a few excellent outside bookkeeping and accounting providers. They are reasonably priced and provide a service you need that could easily take up too much of your time as a business owner. You focus on business essentials while letting others keep your books and provide you reports.
Commingle Elsewhere, Not HereSave the commingling for dance parties and social events. It's not meant for you and the LLC. Commingling is the mixing of personal and business assets. This might manifest itself in the form of a a single account used for biz and personal purposes or with a credit card used the same way. It is particularly easy for a single member or owners of a closely held LLC to commingle. Sometimes it's out of convenience or laziness, and usually there's no malicious intent. But don't do it! Pay personal obligations with personal money, business with business. Maintain separate accounts for each and don't put money from one into the other unless there is a loan or payment being made.
If a member loans the LLC money, a promissory note should be signed by an authorized member of the LLC. Payments to the member on the Note should be carefully recorded and go into a separate account. A personal credit card should never be paid by the LLC's operating account. If there are business expenses on that credit card, create appropriate records, log the data into the accounting software, submit an invoice to the LLC, and have the LLC pay the member the amount due.
Remember, do not pay for the monthly mortgage, the groceries, the Outlets shopping spree, etc, with business funds!
They Said What?An LLC does not have the same "business formalities" requirement as a corporation. This is one reason business people are attracted to an LLC. It's generally simpler and more flexible. Nevertheless, there are still good reasons to keep certain formalities and there are record keeping and reporting requirements. When meetings are held where important decisions are made, those should be recorded. Minutes should be kept.
The terms of the Operating Agreement should be meticulously followed by the members. If it says a formal meeting of members is to be held monthly, hold it! If it requires certain officers be elected by a majority of members, have the election and keep a record. The Operating Agreement is probably the most overlooked, essential component of an LLC. If it doesn't exist or was poorly drafted, like a cut and paste hatchet job, it jeopardizes the business.
Over the years, we've had several clients come in with an Operating Agreement that was so poorly plagiarized it still had the names of the company and members it was "borrowed" from! Genuine business owners don't do that kind of stuff! The Operating Agreement lays our the rules you adopted and intend to follow. Failing to follow the rules agreed to, voted on, and ratified, is an indication that the business is simply an alter-ego. It makes you look like your hiding something or you're just not serious about running a business. Alter-ego LLC members are susceptible to IRS auditors and creditors making all sorts of challenges.