Once a limited liability company (LLC) has been established, it needs to be maintained. LLCs are particularly appealing because they confer the legal protections of a corporation while enjoying the taxation structure of a sole proprietorship or general partnership. However, the benefits of forming an LLC will hardly be realized if the organization is too weak to stand up to scrutiny from regulatory agencies.
If you can’t show evidence that your LLC is a real business, you could lose the same benefits it’s supposed to confer. Therefore, you need to be able to prove to the courts or the IRS that you treat your company as a formal business, not a personal slush fund. Moreover, this loss of benefits could continue to apply should the LLC be liquidated. Fortunately, maintaining an LLC isn’t incredibly tricky.
Short-Term Maintenance of an LLC
There are several measures every LLC should take either leading up to the establishment of the organization or immediately following its inception. These measures are not only good business practices but will also contribute to the strength of an LLC.
1. Create a Separate Bank Account. While blending personal and business finances is not illegal, it is not a good idea. For example, using a personal bank account as the account for an LLC is entirely counterproductive to organizations wishing to enjoy the protections provided by the structure of LLCs. An LLC risks losing its classification as a separate legal entity by blurring the lines between personal and business finances. This loss of status could mean that members’ personal assets are liable for any liabilities or debt incurred by the LLC. Furthermore, a separate bank account simplifies recordkeeping and tax compliance, especially if the IRS audits the LLC. Here are some excellent tips for maintaining a business account:
1. Reimburse business expenses and keep the receipts
2. Record all transactions and be able to document the reason for business purchases
3. DO NOT use the business account to fund personal endeavors
4. Get a business credit card to use for only business expenses to minimize reimbursement complications
2. Create an LLC Operating Agreement. Iowa law does not mandate that an LLC have an operating agreement, but it is highly recommended. An operating agreement lays out each member’s responsibilities, what assets each person contributed to the business, how ownership is structured, how money will be raised and distributed, what your process is for adding and removing members, and under what circumstances and how your company will be dissolved.
3. Acquire Necessary Permits and Licensing. While Iowa does not have a general state business license, certain businesses may require specific licenses or permits depending on the LLC’s intended business type of business. Operating without the required permits or licenses risks the LLC status of the organization and opens the organization to fines or legal charges.
Long-Term Maintenance of an LLC
Moving onward, LLCs must complete some regular maintenance to remain in good standing. These actions intend to ensure that the LLC is neither dissolved through negligence nor weakened to the point of being ineffectual.
1. Filing the Annual Report. Limited liability companies formed, or doing business as a foreign entity, in Iowa are required to file a Biennial Report with the Iowa Secretary of State by April 1st of odd number years. The report can be filed through Iowa Secretary of State’s Fast Track Filing System. The cost for doing so is $60.
2. Amend the Certificate of Organization. An LLC may sometimes wish to amend its certificate of organization for several reasons. One such instance is if any information in the certificate is realized to be inaccurate. Accordingly, Iowa Code § 489.202(5) provides that the certificate of organization must be promptly amended, changed, or corrected when a manager of a member-managed LLC or a member of a member-managed LLC becomes aware that any information in the certificate of organization was inaccurate when filed or has become inaccurate due to changed circumstances. Luckily, amending a certificate of organization is not an onerous task. There are only three filing requirements for an amended certificate:
1. The name of the LLC
2. The date of filing its certificate of organization
3. The amendment to the certificate of organization
Iowa Code § 489.202(2)
The certificate of organization can also be restated and filed with the Iowa Secretary of State, superseding the original certificate. It must state:
a. In the heading, the LLC’s present name and former names and the date of filing the LLC’s initial certificate of organization
b. The changes made by the restatement
*The amended certificate of organization can be filed through the Iowa Secretary of State’s Fast Track Filing System and must be accompanied by a filing fee of $50.
Foreign LLCs authorized to do business in Iowa may apply for an amended certificate of authority with the Iowa Secretary of State if it changes its name (at its state of formation), corrects the state of formation, changes the duration of the LLC, changes its principal office or mailing address, or changes its registered agent. In addition, a foreign LLC may surrender its authority by filing a notice of cancellation with the secretary of state of Iowa, providing, among other things, the address to which the secretary may mail any process against the LLC.
3. Amending the LLC Agreement/Operating Agreement. Similar to a certificate of organization, an LLC may sometimes wish to amend it operating agreement. The operating agreement may be amended only with the approval of all of the members.
4. Maintain Detailed Records. Keeping records of company operations and activities is not a legal obligation, but it’s one of the most effective ways of protecting the organization. In addition, regular record keeping helps prove that the LLC is its own entity, thereby strengthening personal liability protection. Detailed record-keeping may also be necessary for those seeking to receive business loans, as most private financial institutions require comprehensive financial records before engaging in any association with another entity. Any detailed records should include the following documents:
– LLC certificate of organization
– LLC operating agreement
– EIN confirmation letter
– All financial statements and tax records
– All business licenses and permits
– All relevant member and shareholder information
– Meeting minutes
– Any records required by the operating agreement
These records should be kept at the place of business and backed up to a digital server for easy access.
5. Tax Compliance. Typically, LLC members are responsible for paying taxes rather than the LLC itself; therefore, it is critically important that members pay these taxes in full and on time. Failing to do so can put the LLC in poor standing and may even attract unwanted attention from the IRS. One such tax in Iowa that is important to remember is the state sales tax, which is a tax on gross receipts from the sale of taxable tangible personal property. Foreign LLCs may be responsible for payment of Iowa sales and use tax depending on whether the LLC’s business activities create a tax filing requirement. The safest way to avoid taxation infractions is to consult with a qualified tax professional or attorney.
Looking to the Future
While not all suggestions are required by law, they are all sound business practices that will drastically improve the short and long-term viability of an LLC. These practices allow LLC members to focus on operating the company while minimizing their risk of losing liability protection and tax advantages.
This guide is meant to provide foundational knowledge and by no means addresses every concern an LLC should have; the most effective way of protecting an organization is to consult with a qualified business attorney anytime there is confusion or whenever guidance may be beneficial.