Incblog for Entrepreneurs

Covering entrepreneurship and business start up questions for non-residents and US citizens.


Dec 29 2011

LLCs are for Lazy People

by John Gordon | 15:12 GMT

Don’t take this wrong; most people are lazy in some way while they focus on more important things like family, friends, TV, movies, tweeting, Facebooking, or even working on their business. Lazy people don’t like to keep minutes, hold meetings, and generally follow many formalities. Who can blame them? Limited Liability Companies (LLCs) are perfect for people who would prefer to be focused on building and running their business, not on observing the formalities of corporate resolutions and annual meetings. The incredible flexibility of the LLC laws allows for almost any level of sophistication that can be imagined, from stupid-simple to brain-surgery (or mind-blowing) complexity.

However, in laziness lies the risk: the less effort put into maintaining corporate formality the more likely it is that the corporate protection you are counting on will disappear when you need it. For example, did you prepare an operating agreement (OA) after your LLC was formed? Failure to take even this simple step can be a big factor in “piercing the corporate veil” and leaving your personal assets at risk (and wasting the money you spent in forming your LLC). Many new businesses cut corners and go for a basic set up without actually taking the time to finish up the OA

A few states, particularly New York, still live in the 19th Century and require that you publish a notice of formation in newspapers after you form your LLC. Failure to take this step automatically means that you can’t use the courts to enforce a contract (which usually means collecting money that people owe you), and if you also have not prepared an OA either, then you are at substantial risk of having your LLC disregarded. If you also happen to have “forgotten” to get a tax number and just use your personal account for the business, then forget it. Your personal assets are there for the taking by any half-way competent plaintiff’s attorney.

If there is more than one Member (partner) in your LLC, it is absolutely essential that you have an agreement about who will contribute what, who will do what, who will receive what (salary, share of profits and losses, job titles) and how to handle what will happen when the LLC is either shut down or sold off, and what to do about a Member leaving. Naturally, at the beginning of a business, this seems like the least of your concerns, but for that reason this is the easiest time to negotiate these matters. At the end of the business, it will be so much more difficult to work out a settlement – and the court calendars are clogged with these unsettled matters that couldn’t be peacefully resolved. By being “lazy” in the beginning, much more free time will be lost in the future trying to fix these issues.

So what is the optimal point of laziness and diligence, that lets you focus on your business yet sleep at night knowing that your personal assets are (within reason) safe?

Some suggestions:

  1. Make sure to have an OA. Even a crappy one that barely covers the essentials of who contributed what, who gets what (and this is, of course, very easy to do for a one-person operation).
  2. Make sure your LLC has its own federal tax number (EIN) and its own bank account. Don’t mix funds between your LLC and yourself without accounting for it.
  3. Keep good records of your business transactions.
  4. If there’s more than one Member, make sure to iron out an agreement between them at the beginning and not wait until it matters.



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