Thursday, February 11, 2010
Why You Must Keep Good Records For Your LLC
One of the reasons many people start a limited liability company (LLC) is to avoid the paperwork required of a corporation - annual meetings, amendments, board records, etc. But being an LLC is not a free ride, as far as records go. Many states require limited liability companies to keep specific records, and failure to do so can cause you to put your limited liability status at risk.
Piercing the (Corporate) LLC Veil. There is a concept in corporate law called “piercing the corporate veil," which refers to the ability of a court to personally charge corporate executives with liability for their actions on behalf of the corporation, including liability for corporate debts. Within the last few years courts have also held LLC members liable for the debts of the LLC. Starting with a case in Utah in 1997, (Ditty v. CheckRite), courts have found that piercing the corporate veil is appropriate in the context of LLCs, citing factors such as " failure to respect corporate formalities."*
Tricia Davis of the Bernstein Law Firm (Pittsburgh, PA) warns, "...courts all over the country have begun to apply the traditional corporate veil piercing to LLCs to create personal liability on the members for debts of the LLC." And they are using poor record keeping to apply this rule. So keeping good records for your LLC isn't just good, it is absolutely necessary.
What LLC Records Must Be Kept? I looked through record keeping requirements of many states, and created a list of the most common:
· Names and addresses of all members and of all managers.
· A copy of the Articles or Organization and all amendments (Certificate of Organization in some states)
· Federal, state, and local tax returns, for up to 6 years (this was the longest time)
· A copy of the LLC Operating Agreement and all amendments
· Copies of LLC financial statements for up to 6 years
· Copies of all LLC books and records for up to 4 years
· A record of all Member capital contributions, agreements to contribute capital, and dissolution events
· Records of all proceedings of Members for the past 3 years
· A copy of all agreements and contracts of the LLC
· Reports to Members for the last 3 years
These records should be kept in the office of the Registered Agent. Much of this list you are probably already doing, but if not, get busy and put them together. Many LLCs get their Articles of Organization filed and forget to have an Operating Agreement signed. Even a single-member LLC needs an operating agreement, which should include a clause stipulating who will manage the LLC if the Member is unable to do so.
Source: Tricia Davis, Esq.
If you have any questions about maintaining your LLC, please feel free to contact me at The Out-House General Counsel.