Entrepreneurs often prefer an LLC business structure because it offers flexibility in management, protects owners from liability, offers significant tax benefits, and has less paperwork. Part of these benefits make it the better option than corporations requiring detailed administrative work. However, the relative ease of maintaining an LLC doesn’t mean you do not keep a close eye on how your business operates.
Without good governance, you risk jeopardizing your brand, losing the LLC status, and closing down due to revenue loss. Having clearly laid out operating agreements, protocols, policies, and bylaws and a system to monitor adherence helps protect all aspects of the company.
For example, documentation assists you in addressing conflicts that arise internally with members or externally with third parties. Even if you go to court, a well-governed LLC has a better chance of receiving a favorable judgment than one with management issues. So, how do you ensure you stay in control? We will answer you in the next section as we discuss four practices of a well-governed LLC.
1. Keep Detailed and Accurate records
A good indicator of an LLC with good governance is the accuracy with which the records are kept. Practicing good record keeping requires you to have documents of various activities that occur in the company, including:
- Finances
- Membership information
- Business decisions
- Meetings
You should keep these records from when you form your business to ensure the company is transparent in its operations and maintains accountability. Further, you will have an easier time gathering evidence in case of a dispute that may require legal intervention. To ensure you don’t miss important information, create a policy to have every interaction regarding the business in writing.
2. Adhere to an Operating Agreement
Even though having an operating document in most states is not a legal requirement, creating one specific to your LLC’s needs will save you time, energy, and resources. A well-structured and written operating document gives details and guidelines on the following areas:
- Company structure
- Ownership details
- Voting rights
- Profit and loss distribution
- Oversight procedures
- Member rights and responsibilities
- Leadership appointments
Having a document explaining how these areas function and operate ensures the company runs without major challenges. It also reduces the time spent finding a solution if a problem arises. The operating document should undergo regular review as the business evolves or complex challenges arise that require additional clauses to address future disputes.
3. Separate Business and Personal Assets
Sometimes, members can add their personal assets to the business to support a particular venture or save the company from losses. However, the commingling of business and personal assets mainly occurs when members make regular withdrawals from the LLC bank accounts or uncontrollably use the company assets as their own. This practice may lead to serious implications in case a financial or legal dispute arises.
To ensure you stay in control of the LLC in this area, you must require all members to follow the rules regarding financial commingling as laid out in the operating agreement. Make sure you record every member’s capital contribution and all other additional contributions. Afterward, have a procedure for reimbursement, repayments, or redistribution. If the business requires loans, the lending procedure should be followed, and the contract signed for a member investing their money.
4. Stay Compliant with Federal and State Laws
The federal, state, and local authorities require all LLCs to remain compliant with the various laws to continue doing business and using the LLC business structure. Legal compliance covers the following areas:
- Consumer protection
- Tax responsibilities
- Data privacy
- Occupational safety
- Industry regulation
- Non-discriminatory statues
Undoubtedly, it is challenging to remain compliant with the ever-changing requirements. But, it is essential to use all measures to stay current with the various laws. You can hire professionals on a contractual or seasonal basis to help monitor these areas. As you strive to remain compliant, you will solidify your market reach as a credible company and protect your LLC from avoidable lawsuits, penalties, and fines.
Need Help with LLC Compliance?
As a former IRS revenue agent turned tax attorney, Whitney Sorrell brings a unique skillset to serving his business clients. He knows what the IRS likes to see in your company records book and counsels his clients to keep proper documentation throughout the year.
He also assists business owners in preparing their company for growth by addressing all legal matters pertaining to business operations. Schedule a consultation today, and let us help you stay in control of your LLC.
