Many entrepreneurs structure their businesses as limited liability companies (LLC) because like corporations, LLCs offer personal liability protection for their owners. But unlike corporations, LLCs are not legally required to adhere to many of the same corporate formalities required of corporations.
Given that LLCs offer the liability protection of a corporation, without all of the administrative hassles, the business entity might seem like the best of both worlds—and in many ways it can be. However, things aren’t as cut and dry as they might seem when it comes to abiding by corporate formalities.
Piercing the corporate veil
One of the most important formalities required of corporations is to hold annual shareholder meetings and to keep detailed reports of these meetings, known as annual meeting minutes. If a corporation fails to adhere to these requirements, a court can remove its veil of liability protection, known as “piercing the corporate veil,” leaving the corporation’s owners personally liable to creditors in the event of a judgment.
However, owners of an LLC, called members, are not required by state statutes to hold annual meetings and keep minutes. But just because meetings and minutes aren’t legally required doesn’t mean you shouldn’t do it anyway.
While there’s no statutory requirement for LLCs to hold meetings, it may be required by your LLC’s own operating agreement. An operating agreement governs how your LLC is structured and run. If the agreement contains a clause requiring annual meetings and minutes, it’s important you abide by this provision. If not, your LLC could lose its liability protection if challenged in court.
And even if your LLC’s operating agreement doesn’t require meetings, you should consider them for a variety of other reasons. Like corporations, under certain circumstances a court can remove the liability protection offered by LLCs.
While failure to hold meetings by itself will generally not result in the loss of liability protection, it can represent evidence that you’re not treating the company as a separate legal entity from yourself. When combined with other evidence, this may lead the court to “pierce the veil,” allowing creditors to go after your personal assets.
Although fraud and commingling of personal and business assets are the main factors considered by courts when deciding whether or not to remove an LLC’s liability protection, an LLC’s diligent record-keeping and respect for corporate formalities can also be a factor.
In a 2010 case in Connecticut, a creditor sued an LLC, trying to pierce its corporate veil and hold its members personally liable for the business’ debts. The court rejected the creditor’s argument. In its opinion, the court noted that the LLC’s adherence to certain formalities—keeping separate financial records and filing required documents with the state—was solid evidence demonstrating its members were treating the LLC as a separate and distinct entity from themselves.
LLCs and record keeping
Even though as the owner of an LLC you’re not legally required to maintain as many corporate formalities as corporations, state laws do require you to adhere to some ongoing record-keeping requirements. For example, all states require LLCs to file either an annual or semi-annual report with the state agency responsible for registering business organizations.
Such reports typically require you to provide the LLC’s official name, the street address of your principal place of business, the name and address of all LLC managers and members, as well as any changes in the LLC’s registered agent and registered office. Complying with these record-keeping requirements is important to keep your liability protection intact.
While no state legally requires you to submit meeting minutes as part of these reports, holding such meetings and keeping minutes provides strong evidence that you’re abiding by corporate formalities. When combined with diligent record keeping and clear separation of personal and business income and expenses, such meetings offer extra protection if a business creditor ever seeks to pierce your corporate veil.
One of the main reasons you set up your business as an LLC was likely to take advantage of the entity’s personal liability protection, so you should take all possible precautions to keep that protection in place. Don’t give a creditor or court any reason to question your LLC’s existence as an entity separate from you.
Outside of protecting your personal liability, holding regular meetings and keeping detailed minutes simply makes good business sense, especially for multi-member LLCs. Holding annual meetings facilitates discussion and consensus among members in making major decisions and planning for your organization’s future.
Moreover, maintaining minutes helps keep members informed and up-to-date on the LLC’s latest actions and changes. Having a clear record of discussions, votes, and decisions made by your LLC can help reduce disputes and conflict. It also provides solid documentation of the LLC’s internal operations should the courts or IRS ever request such records.
I can help
My office offers valuable assistance with maintaining your LLC’s business records and adhering to corporate formalities, including holding meetings and keeping minutes. In fact, we offer specially designed maintenance packages to help ensure your LLC meets these requirements and maintains the maximum level of protection for your personal assets.
Beyond these administrative responsibilities, there are numerous other legal, financial, and tax issues involved with properly setting up and maintaining an LLC. Given this, I encourage you to consult with me to determine which entity structure is best suited for your particular business and personal situation.
This article is a service of Beverly R. Davidek. I don’t just draft documents; I ensure that families and business owners make informed and empowered decisions about life and death, for themselves and the people they love. I also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, insurance, financial, and tax systems you need for your business.