Dec

Entity Maintenance – Does your LLC Need An Annual Checkup?

By Emily

A lot of us are preoccupied with Christmas this time of year. It’s easy to get swept away in shopping for and wrapping gifts, picking out the perfect tree, and making sure that our houses smell like cinnamon and pine needles whenever guests come over.

Personally, I’ve taken my yuletide inspiration to the kitchen where I am trying some new (healthy?) recipes for Christmas goodies. Last night I made some South Beach brownies that had no flour in them. They were tangy from the yogurt I included… they were a little different, good, but not quite right… the price I pay to avoid those unwanted holiday pounds, right?

Therefore, since the brownies aren’t actually irresistible, I have managed to avoid the temptation of eating them while I sit down to write this article, so I might as well get started…

Before the year comes to a close, it’s a good opportunity to take a look at your business structures to make sure you’re doing what you need to, to keep your entities healthy.

I’ve been talking with my bookkeeper this week to make sure all our records are in place for a number of the entities I’m involved with. It’s a lot of work in the best of times, even more if you’re playing catch-up, so it’s much better to keep up as you go. Consider this inspiration in that direction for 2009.

If you haven’t been taking care of your entities the way you should, set that as a goal for the coming year. I think you’ll find there are some things on my list of ideas below, that your LLC might need to improve on!

Starting Up An LLC Correctly Is Just The Beginning…

A lot of us gleefully start out new businesses by putting an entity into place – like an LLC or S-corp – and we don’t consider all of the ongoing entity maintenance that’s involved in keeping the company in good standing. This is very important to help you keep your corporate veil intact in the event that your company is ever named in a lawsuit and you need it to stand on its own two feet for asset protection purposes.

The below is not a comprehensive list of things that you need to do. Nor am I an attorney or CPA qualified to advise on these matters. These are just things we all need to be aware of, to make sure we’re keeping our businesses on track. They’re things I do for my companies.

My goal here is to get you thinking so you recognize if you’ve been lax in taking care of your company and you’ll get thee to your professional advisor ASAP.

If you need an attorney to set up your entity or advise you, I recommend my sister who has a business law practice in downtown Seattle – Laura Cunningham with Stokes Lawrence – 206-626-6000.

When you start up the company you’ll want to make sure you do the following:

Pay the fee and register the company with the Secretary of State, in the state where the company is being created.
Select a Registered Agent, which could be you, your attorney, or a company who serves as a registered agent in that state. A registered agent must have a physical presence in the state where the entity is formed. So if you are creating a Delaware LLC or Nevada LLC and you don’t live in those areas, then you’ll have to hire a registered agent. This might cost $100 – $200/year. They will not do much besides forward you your mail, and let you know if you’ve been served with a lawsuit.
Get an EIN for the company, for tax reporting purposes.
Elect the tax treatment for your income. For example, one of my companies that holds a lot of real estate simply has its income treated like a partnership and it’s passed through to me, directly. Another company, where I have a lot of contractor income from personal services and other lines of business, is taxed like an S-corp. We’ll be setting up employee payroll through this company.
Get business cards or other marketing material that has your company’s name on it consistently, so when you market yourself or do business with people, they know they’re hiring your LLC and not YOU personally.
Learn to sign your name correctly on behalf of the company. Any documents that you sign (like contracts or the backs of checks you’re depositing to the company account) should have your signature AND your title and the name of the company. For example: Emily Cressey, Member – Home Solutions, LLC.
Create an operating agreement that spells out the membership of the company and how decisions will be made and the company governed. This is important even if you have a single-member LLC.
Fund your company. You need to put a reasonable amount of money into the company’s bank account, so that it can conduct it’s business. This will be considered Capital in your capital account.
Consider hiring a bookkeeper to keep things straight for you. It’s important that you have good records of your business activity. They will also be able to help you identify items that are legitimate business expenses (like driving your car for the business, business travel, meal, office supplies, home office, etc.)
You can also hire an entity management expert, like an attorney or the firm Grasslands uses, Business First Formations, to advise you and help keep all your entity maintenance like annual meetings, etc. handled.

There’s a lot of work to be done when you set up your new entity. Many people just farm the "entity formation" out to their attorney and think that they are covered. In my experience, the attorney will usually help you with the Secretary of state filing, and the operating agreement, but not much else. They don’t help you with your bank account, tax strategy, or tell you how to keep your entity in good standing.

The work doesn’t end, after you’ve completed the following, either.

Here are some things you may need to do after your entity is up and running:

Fill out an annual report and pay a filing fee in the state where your LLC is registered. The state may or may not notify you about this, so you’ll want to check on the secretary of state web page. Normally, you’ll have to write a check ($50 – $200 a year is common, the fee in California is $800/year, I understand) and fill out a short 1-3 page report on your company’s activity.
You may have to pay quarterly income tax to the state on your earnings. My Washington State LLC makes enough money that I have to pay quarterly business tax. This is not your IRS quarterly withholding on your income that you pay if you’re self-employed, this is a different tax. If you need to pay it, your state will probably send you a notification in the mail. I missed the deadline the first couple of times, since I get a lot of junk mail, and apparently trashed the notification from the state. It’s no fun to pay more taxes, but when your company is small and not making much profit, you’ll probably have a fairly low income level and be exempt from having to pay taxes until you reach a more profitable threshold.
Speaking of taxes and the IRS… remember to set aside money to pay your federal taxes. In the U.S. about 20% of what you earn so you’ll be ready to pay taxes on it. Unlike working with an employer who withholds taxes from your salary, when you own your own business, it’s tempting to think that all the money that’s in your checking account is yours to keep. Not so, you’ll have to pay both sides (employee/employer) of FICA which is about 15% of your earnings, as self-employment tax, which is no fun. The rest of the company’s earned income (after you subtract your business expenses) may be subject to your regular income tax rate (say 30%) so remember to set aside money for that, too. (I can tell I’m getting in over my head, here – consult your CPA because there are a lot of ways to really reduce your tax bill by earning income through your business. ) The key point to remember is that it’s not all yours to keep, so don’t just spend it.
Have annual meetings, even if they’re just on paper, and record them in your corporate minutes book (or file folder). There are some good books on this from the library with forms – discs and the like. Your minutes don’t have to be fancy. They should just record major decisions or events within the company each year. However, there are some important items to include, so it pays to do your research and make sure you’re doing it right. Even though annual meetings technically aren’t required for LLC’s, everyone who’s ever advised me on my entities says you should definitely do them for CYA purposes.
Get your money into the company. Once you’ve put in all the time and money to get your company going, the next question is how to get money out of the company. One thing that’s important to do, is to try to have all your income go into the corporate checking account. When people pay you, make sure they write checks to your company (Home Solutions, LLC) not you personally, and when you endorse the checks by signing the back, sign as a representative of the company, not just with your personal signature. The nice thing is that you can get money into the company in a variety of different ways – Google ads, Click Bank, merchant accounts, personal services paid for by check or cash – those are some of the variety of ways that I bring money in through several lines of business. You don’t need to start a different company for every different thing you do. If you do take cash, though, make sure you create a receipt, deposit the cash into the company’s bank account (not Back Pocket Bank) and otherwise keep good records. This will help you pay your taxes correctly and gauge your company’s true profitability.
Get your money out of the company. When your company is not very profitable and you don’t pull down very much money, it’s pretty easy to get some of your proceeds out from time to time by just taking an owner distribution. This is where money comes out of your company’s checking account and is distributed to all members/owners of the company according to their ownership percentage. (For example, if you own 50% of the company, and your mom owns 50% of the company, a distribution of $10,000/year would give $5,000 to you, and $5,000 to your mom.) It’s hard to say where this "not making very much money" threshold is, but I have heard around $30,000 – $50,000 per year is reasonable. Once the company is making more than that, the IRS will want to see you paying salaries to officers of the company.
Having salaries is also a good way to get money out un-equally from the company. Say your mom helped you start the company, but you do all the work. The company could pay you $30,000/year as a salary, and then you could take out additional profits as owner distributions to be split 50/50.

When you are ready to begin payroll, you can set it up with an outsourcing firm. I looked at ADP, which is the gold standard, though pretty expensive. I also found another company, which is only $25/month and seems like it would be adequate, although I haven’t tried it, yet.

Whew! That is a lot of things to consider. Don’t get overwhelmed and think that you have to do all of this now. But it might be a good time to think about whether you need to be doing more and/or need to hire help to get your entity taken care of properly.

The key things to remember are:

Document everything, especially business, ownership and banking decisions in your annual meeting minutes
Keep good financial records
Talk with a CPA or Attorney to make sure your entity is being taken care of properly so that it can take care of YOU – both in terms of Asset Protection and Tax Savings!

Do you agree?

I’d love to get your perspective on this issue – did I miss anything you can think of in this list? What are some things that you’re doing/not doing/wish you knew how to handle when it comes to your LLC and entity maintenance?

Holla’ back!

Emily

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