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Preface

The Ultimate LLC Compliance Guide is built on this simple proposition: to devote more time and energy to running your limited liability company successfully and to avoid potential financial risk, you need to familiarize yourself with your state’s limited liability company act and have efficient, well-organized procedures for dealing with the extensive amount of required paperwork. To accomplish this, you need to first learn about LLC formalities, internal governance, recordkeeping, and LLC mechanics. This knowledge will help you:

• Avoid personal liability for company actions;

• Save money by preplanning company goals, avoiding common mistakes, and handling company maintenance in house;

• Have a better understanding of issues when consulting with your attorney and accountant;

• Realize that LLCs are flexible entities that can be tailor-made to fit your needs.

This book is an operating and complicance manual: it will teach you how to run an LLC. From that standpoint, we presume that you already own or operate an LLC. Nevertheless, we’ll touch lightly on some formation issues as background and to highlight issues that arise while operating an LLC.

This book strives to emphasize the areas of LLC formalities and mechanics you need to know to gain the benefits and avoid the risks of owning and operating an LLC. For example, among the many topics this handbook covers are good recordkeeping, compliance with state law, knowledge of your articles of organization and operating agreement, and member and manager meetings.

If you are just starting to learn about LLCs, it will be helpful to take a long view of LLCs to learn about some concepts. If you are familiar with corporations, some of the concepts here will be familiar to you. LLCs differ from corporations, however. If I had to define an LLC in a simple phrase, I would say that an LLC is a special form of partnership that is granted liability protection through the effect of state law. At first glance, the greatest difference will be in the terminology. LLC owners are not typically called shareholders; they are called owners or members. LLCs can be managed by their owners. This is the simpler form of LLC, called a member-managed LLC. Or, an LLC can be managed by a one or more managers appointed by the members. These appointed managers are not directors or officers; they are simply called managers. This is a slightly more complex form of LLC, a manager-managed LLC. We’ll cover these concepts in depth in this book.

QUICKLY FIND WHAT YOU NEED TO KNOW

Limited liability companies are complicated, with numerous requirements and issues surrounding them. By breaking the issues into focused part, this book tries to make it as easy as possible for you to quickly locate the information you need.

Part One, Sources of Authority, explains and defines limited liability company acts, articles of organization, and operating agreements. Devoting a chapter to each topic, this part details:

• How state limited liability company acts provide the legal basis for forming and operating your LLC while allowing for flexibility;

• What information the articles of organization must or may contain and why this is important to you personally and to your LLC; and

• Why you need to know what your operating agreement requires and how you can structure your operating agreement to suit your particular needs.

The part closes with an overview of taxation requirements and general information for all businesses.

Part Two, The Limited Liability Company Players, identifies and describes the many participants that appear in the LLC universe. By clearly defining LLC roles—such as promoter, member, manager, and agent—you establish who is responsible for what in your LLC and you can increase your chance of success and reduce your potential personal liability.

Part Three, Handling Ownership and Ownership Units, outlines the law surrounding the issuance of ownership to founders and investors and the law surrounding transfers of ownership. Chapter 7 goes further: it analyzes ways you can use your operating agreement to control ownership in your LLC.

Part Four, LLC Formalities: Meetings, Minutes, and Resolutions of Managers and Members, focuses squarely upon legally mandated formalities such as meetings of managers and meetings of members. We fully outline, with sample documents, the process for calling, noticing, and conducting such meetings. We also address how to conduct LLC meetings by informal written resolution—a real time saver.

Part Five, LLC Lawsuits and Personal Liability Protection, sets forth a framework for maximizing your LLC’s personal liability protection. Chapter 11 discusses basic information about suing and being sued as an LLC, while Chapter 12 brings the point home by relating real-life cases in which the owners of LLCs and corporations were judged personally liable for injuries or debts because of lapses such as poor recordkeeping, inadequate capital, absence of resolutions and stock records, and personal use of entity funds.

USE THE BOOK’S FEATURES AS HANDY REFERENCES

Sample Documents, Checklists, and Forms. Throughout this book, you will find sample documents, checklists, and forms. These items are included to help you better understand the issues discussed and to demystify the limited liability company process. If you would like to use any of these forms in your LLC, it’s a good idea to consult your lawyer or accountant for input and advice.

Insider Tips. As you read the text, notice the boxes located throughout the text. These are provided to emphasize important aspects of a discussion or to highlight additional information. They are particularly helpful when reviewing a chapter or when studying one of the larger sample documents.

The Book includes three appendices:

Appendix A. Supplemental LLC Forms. You will find 13 example forms and documents here to help you create the legal language necessary to set up and manage the legalities of your LLC.

Appendix B. State Reference Information. This is a directory to all 50 states and the District of Columbia, with all the material you need to get the forms and compliance items you need for whatever state you’re operating in.

Appendix C. Glossary. Because of the legal and structured nature of LLC formalities and procedures, there may be a term or phrase within the book’s discussions that you may not quite understand. To help you quickly find easy definitions to such terms as “piercing the corporate veil,” “tort,” and “indemnification,” you can refer to the Glossary (Appendix C).

Finally It would be impossible to cover all the LLC bases in one volume. One of my law professors once said, “This course will focus on the peaks.” Likewise, this book focuses on the peaks of LLC formalities and law. If you are interested in exploring some the valleys, your local law library is a good source of information.

The Ulitmate LLC Compliance Guide is not intended to be a substitute for competent legal and professional advice. Laws change; the business environment changes. Don’t try to do it all. As a businessperson, you must develop good working relationships with a lawyer, an accountant, and an insurance agent. Be aware that laws vary from state to state and the issues presented in this book are general in nature. Use your professionals to help you make this book work for you.

With that in mind, note that this volume occasionally warns about certain topics that present potential pitfalls and complex issues that warrant a visit to your local attorney’s office. Heed these warnings because small legal errors have a way of becoming enormous legal problems over time. In business law, some topics are simple and some are complex; if your needs are obviously complex, don’t try to do everything yourself. Sometime the best advice an attorney can give is “get a qualified attorney.”

Let’s get started.

SUPPORTING WEBSITE

You can find the forms included in this book and other materials related to starting and managing an LLC at this website: www.entrepreneur.com/formnet. You can customize these forms for your use as appropriate. There is no special code or costs involved in taking advantage of the materials at this site.

ABOUT THE AUTHOR

Michael Spadaccini is a business law author and attorney. He has practiced business law for small businesses and start-ups in San Francisco and Silicon Valley since 1993 and more recently in Austin, Texas. From 1991 to 1992, he was the Editor in Chief of The Connecticut Probate Law Journal, published by his alma mater, Quinnipiac University School of Law. He is the author of several business law books published by Entrepreneur Press and founded the legal education Web site, LearnAboutLaw.com.

ACKNOWLEDGMENTS

I’d like to thank Jere Calmes, editorial director of Entrepreneur Press, and the entire Entrepreneur Magazine and Entrepreneur Press team for giving me the opportunity to write this book.

I am also grateful to:

• Attorney, friend, and fellow golfer Dan Sweeney, who has contributed to this volume and to all my books by providing invaluable legal research.

• Attorney and friend Robert Kleinman, who has contributed to this volume and to all my books by providing invaluable legal research.

• My law professors at Quinnipiac University School of Law, who taught me the foundations of corporate and business law, which I now offer to you.

• All the clients who have sustained my law practice throughout the past 14 years and whose support helped me grow to become an expert in my field, with a special thanks to Don LeBuhn and his family’s business, Evolution Furniture of Berkeley, California, my first clients, for whom I organized my first corporation back in 1993.

• My family and friends, who offered their support throughout the drafting of this volume.

• Emmett Ramey, president of Oasis Press, who gave me my first book contract, based not upon any experience I could demonstrate, but solely upon my repeated and vehement pronouncements that I would do a fine job.?

Finally, and most important, my wife Mai.