As most Box and fitness business owners know, one of the fundamental ways new business owners can protect the business (and themselves) is by creating a legal entity through which the business runs. For most Box owners, this means forming a limited liability company (LLC) – in some cases a corporation, but we’ll stick to addressing an LLC.
Diving into all the benefits of obtaining a formal legal structure is a topic for another post, but suffice it to say that forming an LLC is a critical step for businesses because it limits the liability of owners for the acts of the business, can provide certain tax benefits, and signifies a level of credibility to would-be customers. These are just a few of the key benefits of obtaining a legal structure, and most owners know that this is a must-do first step when starting a business.
But what happens after the business is formed? There are lots of resources that describe how to form a company, but few explain what a new company needs to do to keep the registration current, maintain its formal legal status and adopt the proper internal practices necessary to take full advantage of the LLC structure.
Why are these things important? In extreme cases, neglecting to follow certain registration and reporting requirements can result in the dissolution of the LLC. But from a more practical standpoint, observing certain formalities and following the rules outlined in the LLC’s documents will result in a greater level of protection for the owners, will add predictability and structure to day-to-day business operations, and will help prevent disputes down the road.
Here are a few things that LLC owners should consider doing in the months and years after they form the company:
All state and local governments require some sort of annual reporting requirements owners must comply with to keep the LLC registration current. Sometimes the governing body will send you reminders, but not always, so it’s a good practice to understand when and how you must comply.
Often times business partners, after a company is formed, will contribute additional capital to the business that goes undocumented. Loans big and small are made to the company by the owners, but they don’t take the time to document them. Or a new owner joins, contributes capital, but nothing is in writing. Avoid doing this. Ask a lawyer to help you document these transactions.
An operating agreement is a document executed by the owners that sets out the rules for the LLC. Think of it as your company’s constitution. Some states require LLCs to have an operating agreement, but as a matter of practice, every LLC should seriously consider adopting one. Most agreements set out things like ownership interests, management and authority to make decisions on behalf of the LLC, how profits are distributed, and how the LLC pays its taxes. Understanding these issues up front will make for smoother sailing for business partners.
And speaking of taxes, it goes without saying that you need to pay them or you won’t be in business for long. But don’t just pay taxes. Hire an accountant who is familiar with the legal structure you’ve adopted and work with that person to understand how to comply with the tax laws and how best to utilize the structure to your advantage.
Record keeping is one of the most underutilized tools in a company. To protect the LLC and promote its growth, owners should keep detailed records regarding employees, independent contractors, financials (income, expenses, assets, liabilities), insurance, waivers, participation agreements and customer information, among a host of other things. What happens if you get audited, a dispute arises over payment or a member gets injured? You go straight to the records. Not only will the records help protect you, they’ll help you accurately track what’s going on in your business – something all owners should take the time to do.
NOTE: None of the information in this article is intended to create an attorney-client relationship. This article has been prepared for informational purposes only, does NOT constitute legal advice and is not a substitute for seeking legal counsel from an attorney.