How To Manage an LLC: Everything You Need to Know
To manage an LLC, you must create the LLC, establish a payment allocation system, create an operating agreement and protect your assets using insurance if necessary. 4 min read
How to Manage an LLC
To manage an LLC, you must create the LLC, establish a payment allocation system, create an operating agreement and protect your assets using insurance if necessary. LLCs offer the limited personal protections of corporations but without the burdensome requirements of a corporate structure. Further, LLCs are easy to create and are less costly. It is a great option for people who do not intend to raise a large amount of cash.
LLCs permit special allocation of profits, which is the proportionate share of member profits based on the amount of ownership, otherwise known as guaranteed payments. This also allows members to write themselves checks whenever they need money, but only if the LLC has cash readily available. Further, members can record profits on their tax returns while writing off any losses in the process.
Further, a managing member’s share of any bottom-line profit is not classified as earned income due to the managing member being considered an inactive owner, giving them access to tax-fringe benefits. A guaranteed payment system is also earned income to each member, allowing them to enjoy tax-favored fringe benefits.
Creating an LLC
The articles of organization creates your LLC and must be registered with the LLC corporate division of your respective state. The corporations division is usually associated with the secretary of state office in your state. Fees vary, but they usually amount to around $100.
States usually give you a one-page blank form, where you supply essential details about your LLC. Details should include:
- Contact Info
- Registered Agent
Other states may require you to list all names and addresses of each LLC member.
An operating agreement outlines the basic management structure of your business. It is not a document you need to register with authorities, but you should draft one for the sake of organization, and to ensure that all members know their roles and duties. Further, you should detail the compensation plan in the operating agreement so all parties are aware of how they will be compensated, including their share in the business.
EINs are used by the IRS to label and tax your business. Getting a federal employer identification number is crucial for a number of reasons, including:
- Hiring Employees
- If Your LLC has more than one member
You may get an EIN for free by visiting the IRS website. An EIN is also crucial when you open a business bank account.
Dividing Business and Personal Assets
Even though certain states frown upon this practice, some individuals create sole-member LLCs to obtain a new EIN and get a new line of credit. Regardless, you should avoid mixing business and personal lines of credit. With that, if a member secures collateral or funding based on his or her personal credit score, consult an account to document the transaction accordingly.
Regardless of how the credit is obtained, you should always maintain a firm wall between personal and business matters. Failure to do so may open up your LLC to legal risk despite LLC personal liability protections. Some courts and creditors have been able to get around LLC liability laws if members comingle personal and business activities.
In the event that LLC laws do not protect your assets, you may also get a sound insurance policy that protects your assets. For example, if you’re a massage therapist who injures a client, your insurance policy will protect your assets in case a lawsuit occurs. Moreover, insurance is a great asset should a court ignore your liability protections. Insurance can also protect business and corporate assets from judgments and lawsuits.
With that, it is worth noting that commercial insurance does not safeguard corporate or personal assets stemming from unpaid business debts, regardless of whether they’re guaranteed personally.
Annual filing and other regular paperwork is a necessary part of maintaining an LLC. For example, an LLC based in Michigan must renew annually, and the LLC could risk being dissolved if you fail to file on time. For this reason, you must be sure that your articles of organization remains in good standing, and be sure to include any changes to the LLC by mailing in updates to the IRS and your state. When signing any documents for the company, use the full company with the applicable suffix (LLC, L.L.C, etc.) and include your name as the member of the LLC with your official title.
Want to learn more on how to manage an LLC? You can find out more by, submitting your legal inquiry to our UpCounsel marketplace. UpCounsel’s attorneys will help you through the management process and will find you the best ways to protect your personal and business assets. We will also help you plan for emergency situations, such as lawsuits, and they will guide you through the rough patches so you can focus more on your business operations.