Essential Small Business Advice – Follow Formalities
Many small business owners think that if they set up an LLC or corporation, they are fully protected from individual liability. Not true. While setting up the company structure is a critical first step, it is imperative that you perform certain formalities throughout the year to maintain your liability protections.
- Annual Meetings
Corporations are required to hold an annual meeting every year and maintain a record book of the meeting minutes. While LLC’s are often not required to hold an Annual Meeting, we recommend that the members and managers of the LLC still hold a formal meeting on a yearly basis. The meetings are an opportunity to discuss and document important business decisions made throughout the year. Including your CPA, attorney, and other business advisors in the meeting will make the meeting even more productive. You can review tax planning for the year and make sure your legal documents are up to date to fully protect you.
- Written Documentation of Business Decisions
In between the Annual Meetings, the company should document all major business decisions and contracts. Employment contracts, company loans, significant asset purchases, and similar events should all be documented by written and signed resolutions.
- Separate Company Funds
Company funds and personal funds should be kept separate. If personal assets are co-mingled with business assets, it is much easier for creditors to gain access to them. The company should have its own bank account and in many cases will need a separate tax identification number.
Observing these formalities will provide you with a much stronger argument that your chosen corporate form should be respected from the challenges of creditors. The steps outlined above are especially important for single member LLC’s. We often see the owners of single member LLC’s skipping these important steps since they are the only person involved. Simply forming an LLC won’t be enough to protect you when a legal challenge comes along.
If you’re interested in learning more about LLCs, here is an article on the advantages LLCs provide to business owners and entrepreneurs.