We form various types of companies for our clients. One of the most popular is the single-member (i.e. single owner) limited liability company (LLC). LLCs are a popular form of business entity because they offer flexibility, are inexpensive to form and maintain, and (if operated properly) can protect the owner’s personal assets from the company’s creditors.
As I mentioned in my prior article, many individuals are under the misconception that filling out a form and sending it (along with a filing fee) to their state’s Secretary of State’s office is all that is needed to afford them the protections and advantages of an LLC. While it is true that filing your LLC’s Articles of Organization is a necessary first step, there are at least three additional documents we recommend preparing and keeping current in order to increase the likelihood that your LLC will withstand a legal challenge.
- Organizational Minutes. This is a document that sets forth certain key provisions about the LLC when it is organized. Some are simple and obvious such as the name of the company and the date on which it was formed. Others vary; some examples are (a) who is entitled to open a company bank account, (b) what is the end of the company’s fiscal year, and (c) what did the owner contribute to the company in exchange for her ownership interest?
- Operating Agreement. An LLC operating agreement describes important details about the ownership, operation, and management of the LLC. Some operating agreements may be short, while others may go on for over a hundred pages. Clients often question the logic of having a written operating agreement for a single-owner business. Taking the time to type out a contract essentially between a person and herself doesn’t seem to make sense. I’ll explain why we think this is important (perhaps even more important that with multi-owner LLCs) below.
- IRS Form SS-4 (EIN). There may be certain situations where it is not necessary or advisable for a single member LLC to obtain its own Tax ID from the IRS – I urge you to consult with your CPA about that. In my experience it is almost always advisable (and in some cases necessary) for an LLC to obtain its own federal employer identification number (EIN) – often referred to as your “tax ID”. Most banks require this in order to open a bank account in the LLC’s name.
Note that typically none of the documents described above are filed publicly. They are internal documents to be kept on file with the LLC’s important records.
The reason our firm recommends these documents so strongly is that single owner businesses are the most susceptible to “veil piercing” attacks. Veil piercing refers to an attempt by an adverse party to hold a business owner personally liable for the business’s actions or debts. Courts consider several factors when determining whether to pierce an LLC’s veil and allow access to a business owner’s personal assets; two such factors are (a) the absence or inaccuracy of customary company records, and (b) failure to observe typical company formalities in terms of documentation. (It is worth pointing out that these factors originated in corporation law and corporations are not the same as LLCs, however in many states, including North Carolina, courts have applied corporation veil piercing factors to LLCs.)
In summary, making sure you have these basic documents in place when your company is formed can help preserve the limited liability protections of your LLC. The documents need to be accurate and kept current, which is why we recommend keeping minutes and revisiting your LLC operating agreement at least annually. If you are considering forming a single member LLC, our firm has a package of services that include versions of the documents above that are customized for your unique situation. Please don’t hesitate to contact me at chris@clark.law.
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