Common Mistakes in Managing Your LLC (and how to avoid them!)
Feb 23, 2017
As a longtime member of the Puget Sound Business Community, Pacific Northwest Law Group appreciates its role as a trusted provider of legal services to companies in the Puget Sound and beyond. In this role, we have had the benefit of both assisting companies in managing their legal risk and helping to resolve legal issues when they arise. This experience has provided us with a wealth of knowledge on common legal issues affecting LLCs and how to prepare for and minimize risks associated with LLCs. Here, we attempt to provide a (non-exhaustive) list of common LLC management mistakes and how to avoid them:
- Actions Prior to Legal Formation: Planning to start a business is not the same as actually starting one. Hiring employees, signing contracts, purchasing equipment, and other activities should be postponed until after the legal formation of the LLC. Many people make the mistake of doing some of these things prior to the formation of their company and subject themselves to personal liability and potential fines!
- Formation and Operation Mistakes: Choosing the right structure for your LLC, drafting documents (including an operating agreement) that adequately sets forth the structure of your LLC, and properly dividing ownership of the LLC are all a source of common legal issues for LLCs in our area. It is important that the firm that helps you decide on the ownership and management structure of your LLC understands your goals, the people involved, and your line of business, and drafts your documents to properly address these issues.
- Improper Asset Protection: Too often we see companies make the mistake of assuming that having an LLC is all they need to do to protect their company and personal assets. In actuality, formation of an LLC is the first step, not the last step, in asset protection. Other items for consideration include insurance, having multiple LLCs for different purposes (including operation and asset holding), and ensuring that assets are titled in the proper name (whether that be the LLC or personal name of an individual). It is important that all LLCs have an asset protection plan in place.
- Liability Confusion: Another common mistake we see is when an LLC owner and/or manager fails to sign important LLC contracts (ex. employment contracts, purchase and sale agreements, real estate leases, etc.) in the name of the company and instead signs it individually. This can result in personal liability. Those with the authority to sign company agreements should be taught how to do so in a way that effectively protects the company and the individual signing the document.
- Recordkeeping Mistakes: A new LLC may not have a department (or even an individual) assigned to maintain the records of the LLC. This means that it is important for the manager of the LLC to understand what and how records must be maintained for tax and legal purposes.
- Multi-Member LLCs: While having a multi-member LLC in itself is not a mistake, it can be a mistake to give equal decision-making power to both members. This is an issue that should be assessed carefully, and there may need to be some type of tiebreaker provision in the operating agreement should the members decide to take equal interests, to avoid stalling the company’s progress.
LLCs are a common and helpful tool for avoiding personal liability for owners without some of the burdens of incorporating. However, merely registering with the Secretary of State is not enough. LLCs need properly drafted documents, an asset protection plan, a clear understanding of how to sign corporate agreements to avoid personal liability, a recordkeeping protocol, and an understanding of the benefits and consequences of having multiple owners.
At Pacific Northwest Law Group, we are proud of our long history of providing advice to our clients to help them avoid common mistakes and protect what is most important to them. If you are considering forming an LLC or you have an LLC but you are unsure about whether you are utilizing it properly, we welcome you to contact us today. We help our clients choose the proper business entity, draft documents that fit their needs, stay aware of potential liability issues, and resolve legal issues that arise over the life of the LLC.
In March, Pacific Northwest Law Group will be holding a seminar on this topic. Please see our upcoming events page for more information and how to register.