The LLC is a very flexible type of business entity. Like a partnership, it is typically managed under an operating agreement, which serves as a sort of contract, among its owners, who are known as members. The members have all the freedoms of contract law to structure their business relationship, which makes the strict formalities required of corporations unnecessary. According to Companies Inc., this freedom and flexibility is one reason why LLCs are so popular.
The operating agreement of an LLC serves as its basic allocation of rights and responsibilities. Unlike a corporation, LLCs are not required to have regular shareholder or board meetings, so there are no minutes to record. Whereas in the corporate hierarchy each tier of control, from executive to board to shareholder, has the obligation to report up the chain, there is no corresponding structure in an LLC. Managers are subject to the members, but there is no formal meeting required among the members and the current operating agreement reflects the terms of their business association. Even when no written operating agreement is required, there is no requirement for members to record minutes of any meetings because, unlike executives and directors, they are not accountable to anyone but each other.
Nevertheless, state laws often place some formal requirements on LLCs. For example, in Florida, an LLC must maintain a current list of all its members, managers and managing members, including their names and addresses. The company must also have a copy of its current operating agreement if it has one, the articles of organization, any powers of attorney or documents filed with the state and financial statements and tax returns for the previous three years. According to Gaebler, many states require annual reports and the payment of franchise taxes in addition to these internal records.
Piercing the Veil
Like a corporation, an LLC protects its owners from personal liability for the company's debts. However, just as with corporations, this veil of protection can be pierced by a court if it appears fair and reasonable to do so. One of the factors courts consider is whether the owners of the company kept their personal finances distinct from those of the business. Failure to keep proper records is another factor. With LLCs, the veil of protection is sometimes pierced to force one member to pay the company's obligations to another member.