Limited liability companies, LLCs, are popular business forms for small businesses and startups because they blend the best features of corporations and partnerships. One issue in starting an LLC is deciding on the internal management structure for the company. An LLC may employ a non-owner manager, or it may be managed by one or more of its members. Regardless of what management structure an LLC chooses, managing the company requires an understanding of the law and attention to detail.
Fit your business needs with the right LLC package
Consult with an experienced certified public accountant before deciding on whether to member-manage the LLC or hire a non-member manager. Although LLCs do offer their members pass-through taxation, which lets them avoid the double taxation associated with traditional corporations, the tax issues involved in LLC structure and management can get tricky. In general, nonmanaging members in an LLC, not nonmember managers, will be liable for self-employment tax under current law. Managing members, however, can be. Depending upon how much the managing member earns, this additional tax could be considerable.
Develop a relationship with a qualified business and/or civil litigation attorney. An LLC is considered a legal entity with an existence separate from that of its owners. As such, many jurisdictions do not allow nonlawyer employees or members to appear in court and handle a lawsuit on behalf of the company, as this can be considered the unauthorized practice of law. Additionally, you may confront legal questions from time to time in the course of business. Seeking competent legal advice on behalf of the LLC when it's needed can help you make better decisions in the best interests of your company.
Develop a general understanding of the law as applied to your company. Although you may never be able to appear in court on behalf of the company if you aren't a lawyer, knowing what the law is in your state and your particular area of business can help you avoid costly mistakes. Understanding LLC law in your jurisdiction is particularly important. LLCs offer their members limited liability against suit for torts committed by company employees or co-members. Each member and employee, however, is personally liable for his own actions regardless of corporate form, so the limited liability shield won't protect you if you do something wrong. Furthermore, the shield may disappear entirely if you fail to manage the company in accordance with state law.
Familiarize yourself with the business purpose set forth in the LLC's articles of organization and also every provision of the operating agreement, if the company has one. If no operating agreement exists, encourage the members to develop one. Operating the company outside the business purpose declared in the articles could lead to a loss of limited liability protection for the members. Failure to observe the requirements of the operating agreement can also lead to a loss of limited liability. If your mismanagement of the company causes other members to lose limited liability, they could sue you to recover their damages.