The limited liability company is a popular business entity choice for small businesses. One reason is the lack of formality, but that doesn’t mean you shouldn’t document certain decisions.
A limited liability company is a business entity that combines the liability protection of a corporation with the tax flexibility of a partnership. It is specifically designed for use by small businesses. One of the design factors is the lack of formality. Unlike a corporation, the running of the corporation does not require significant documenting in the company records. That being said, you should still go ahead and record certain decisions.
A corporation is required to have an annual meeting and keep minutes of it. Most people assume that a limited liability company does not have to do so. This can be a mistake. An LLC is the product of state law and states tend to pass different legislation. As a result, your state may require you to have an annual meeting even though you are an LLC. Failure to do so could put the legitimacy of your structure at risk.
Any business should make a record of important business decisions. This is true regardless of the type of business entity you are using. Why? Well, it creates a paper trail regarding how business was handled and by whom. This paper trail can save your bacon later on if a dispute arises, particularly if an investor starts questioning decisions.
Documentation is also a huge issue where owners do business with the company. The LLC is supposed to be a separate business entity, unique and independent from the owners in question. That being said, many small businesses often will do business with owners. For example, a business might rent space from one of the investors. This brings up issues of conflict of interest, to wit, is the investor getting a windfall of money? By documenting the decision at the time it occurs and the concurrence of all owners with membership interest, you can avoid disputes down the line.
Finally, documenting important decisions made by the managers of an LLC just makes practical sense. Documenting them means the managers took the time to sit down and actually discuss the decisions being made. In a small business, taking the time to deal with such issues can often help avoid bad choices.
Richard A. Chapo is with SanDiegoBusinessLawFirm.com - providing
limited liability company formation in California.
