Any time you launch a small business, you face an important decision about how you’ll structure it. There are a number of legal structures for entrepreneurs to consider, but one of the most popular is the Limited Liability Company, or LLC. Among other things, the LLC structure provides some built-in personal wealth protections, shielding business owners’ personal interests from lawsuits and creditors.
But of course, these protections come with some related responsibilities. To maintain the personal liability benefits of your LLC, it’s crucial to maintain regulatory compliance. And while LLCs have a much lighter regulatory burden than Corporations do, there are still some important safeguards that must be put into place. After all, failure to maintain full regulatory compliance may result in the courts stripping away some of those all-important LLC protections.
What is an LLC?
To understand the nature of LLC compliance, it’s first important to understand how LLCs operate.
When you start an LLC, you’re establishing your business as its own separate entity. In other words, there is a legal separation between the business owner and the business itself. This is one of the main structural distinctions between an LLC and, say, a Sole Proprietorship.
The upshot of this is that your personal assets and liabilities are separate from business assets and liabilities. So, if someone brings litigation against your company, you can keep your personal or familial assets off the table completely.
To uphold these personal liability protections, however, LLC members must be meticulous in maintaining their business and personal distinctions. This means having a business bank account that’s separate from any personal bank account, and never using personal funds to pay for business expenses (or vice versa).
What are the Key Requirements for LLC Financial Strategy and Regulatory Compliance?
That brings us back to the specifics of LLC regulatory compliance. Here it’s important to note that the rules can vary a little bit from state to state; for example, forming an LLC in California looks a bit different from forming an LLC in Delaware.
With that said, there are a few compliance basics that hold true more or less across the board.
Initial Requirements for Establishing Your LLC
There are a few basic regulatory compliance considerations to keep top of mind when you register your LLC. Consider:
- You must register an LLC name that isn’t already in use by another LLC in your state. Most states have an online directory where you can double-check this sort of thing.
- You’ll need to choose someone to serve as your Registered Agent. This can be a person or an organization, but there must be a physical address in the state where you’re registering your LLC. A P.O. Box won’t cut it.
- You’ll also need to file an initial LLC registration fee. This amount can vary from state, but often it’s just around $50 or so.
Fulfilling these requirements will establish your LLC on the right regulatory footing, yet there are some additional compliance concerns for LLC members to keep in mind.
Internal Requirements for Your LLC
When it comes to internal requirements, LLCs face much less rigidity than Corporations do. After all, Corporations must have annual shareholder meetings, adopt and maintain bylaws, maintain meeting minutes, and beyond. LLCs are exempt from almost all of these requirements.
With that said, there are a few safeguards that LLCs should put into place. Though not legally required, it’s advised that LLCs each maintain up-to-date Operating Agreements, specifying how their company is structured and run. Doing so can help reduce the likelihood of litigation between partners, should there be a dispute or a falling out.
Along the same lines, it is not strictly mandatory that LLCs record all transfers of membership interest, but it can certainly be a lifesaver should any kind of disagreement emerge.
Filing Requirements
LLCs do not face the same robust reporting requirements that Corporations do, yet there are a few instances in which LLC members must keep the government informed.
- Most states require LLCs to file brief reports each year, simply reaffirming their business name, the names of the members, and the name and contact information for the Registered Agent.
- If an LLC changes its Registered Agent, or if the Registered Agent changes their contact information, the LLC must file updated contact information with the state.
- In some states, the LLC must also file a special tax that is levied exclusively on this type of business. (Right now, California is the only state to have its own LLC tax, and it’s a flat rate of $800 annually.) This comes with some additional, state-specific reporting requirements.
Best Practices for Maintaining Compliance
Beyond these reporting and filing requirements, there are some general guidelines that can help LLCs maintain their personal liability protections. In brief:
- It’s crucial for the business to have its own bank account, not connected in any way to a member’s personal banking or checking account.
- To reiterate, LLC members should follow this basic rule of thumb: Never use personal assets to pay for business expenses, and never use business assets to pay for personal expenses. Take the time to ensure payments all come from the appropriate account.
Enjoying the Benefits of an LLC
It’s clear why the LLC is such a popular business structure. There are many built-in advantages, including personal wealth protection. What’s more, those benefits come with relatively minor responsibilities attached to them, especially when compared with Corporations and other business structures. For example, the annual reporting requirements that come with the LLC are fairly minor, and allow LLC members to maintain a high degree of confidentiality.
Even so, there are some regulatory steps for LLC members to be aware of. Maintaining full compliance, and keeping finances above board, can help to prevent any instance in which a court “pierces the corporate veil,” depriving LLC members of some of their cherished protections.
Before establishing your LLC, be sure you’re in the know about each of these important regulatory considerations.
