The LLC is a popular way to structure a business because it provides personal liability protection to the members. This is similar to how a corporation protects shareholders–but without as many administrative formalities. However if you’re an LLC member, don’t let this lull you into complacency.
As a business owner, you’re responsible for the proper governance of the company. If a conflict arises—either among LLC members or between the company and a third party—the governing documents and methods may help prevent a conflict from escalating into litigation. Even if a dispute reaches court and you are unable to control the outcome, you can ensure that the LLC presents clear evidence of its intent and purpose by practicing good governance.
Good LLC governance hinges on four key practices:
1. Practice good recordkeeping.
-Document key business decisions.
-Store records in a secure and fireproof location.
-Provide members with access to records as required by the LLC’s operating agreement.
-Keep the list of members and their ownership interests current.
-Keep the LLC records organized.
2. Don’t commingle company and member assets.
-Keep all member and company assets completely separate. The initial contributions that members make and any later contributions made after a capital call should be clearly documented as such.
-Make sure any loans —and the repayment terms—are clearly documented.
-All distributions and any advancements to members should be documented as such.
-Members who are also employees receive a paycheck from the LLC payroll account like any other employee would.
3. Follow the operating agreement.
Do what you say you’re going to do. Your company should have an operating agreement even if your state’s statutes don’t require one. A well-drafted operating agreement provides a written record of owner expectations in terms of structure and ownership, as well as business, operations. The agreement is an essential tool for keeping and/or restoring peace among LLC owners and restoring the peace if a disagreement arises. And, if a dispute arises between the LLC and a third party, the operating agreement may become evidence the fact finder considers to resolve the dispute.
4. Amend the operating agreement if the LLC is acting inconsistently with it.
-If the LLC ends up in court and the intent of the LLC or its members is at issue, the fact finder will look at three main factors to make a determination: the LLC documents (the articles of formation filed with the state, the buy-sell agreement, if any, and the operating agreement), and the actions of its members.
-When the actions of the members and of the LLC are in sync with the governing documents, a court is more likely to find an intent that corresponds to the original intent of the members when they formed the company. But when the operating agreement says one thing and the LLC or its members behave differently, intent is wide open for interpretation. If that happens, a court may place greater weight on the actions of the members or the company. The court may make findings of fact vastly different from what is found in the LLC documents, resulting in a potentially disastrous outcome.
Practicing good governance helps make the intent and purpose of the LLC clear to its members and to outside parties. If a conflict goes to court, good governance provides a clear picture of what the members intended for the company.
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