What Should an LLC Member or Manager Do at Quarterly Meetings?

Businesspeople in conference room

Unlike a corporation, the observance of “corporate formalities” is not an important part of maintaining the shield from liability and other protections and advantages offered by the LLC form of doing business. The term “corporate formalities” normally means holding annual meetings of the members, providing written notice in advance of such meetings, preparing detailed minutes of matters decided upon at such meetings, and so forth. The Pennsylvania Act indicates that failure to observe such corporate formalities shall not be considered a factor tending to establish that the members have personal liability for any debt, obligation, or liability of the LLC where the Certificate of Organization or Operating Agreement of the LLC do not specifically require such formalities to be observed. However, this does not mean that LLC members are completely free to ignore the separate legal identity of the LLC. For example, members must always keep in mind that the LLC assets and funds are owned by the LLC, not by the LLC’s members. Separation of LLC assets from members personal assets is very important. It is also important for the members not to pay personal expenses from the LLC funds or bank accounts.

A. Member Votes. Certain fundamental changes in the life of an LLC, such as a merger or liquidation, require a vote by the members. These fundamental changes include amendment of the Certificate of Organization, amendment of the Operating Agreement, merger or consolidation of the LLC, and winding up and dissolution of the LLC.

B. Manager Action. Matters of general operating policy should be considered and authorized by the general manager or managers of the LLC. Although there is no statutory requirement with respect to how frequently the managers should act, it is advisable that they meet at least quarterly. In addition, a specially convened meeting of the managers may be called if action is required before the next regular meeting. Action by the managers may also be taken by unanimous written consent. The managers can vote without a formal meeting but if a significant matter is being voted on it may prove useful to schedule regular managers’ meetings to address it on a quarterly or at least annual basis.

Matters appropriate for manager action that can be immediately approved by written consent or voted on at a meeting, include the following:

1. Appointment of officers, setting of salaries, and declaration of bonuses (at least annually, typically at a meeting of the managers immediately following the annual meeting of members).
2. Opening or closing of LLC bank accounts and the designation and change of LLC managers and officers authorized as signatories. The signing member should secure a copy of the signature card from the bank and place it in the LLC binder.
3. LLC borrowing or loan agreements and delivery of collateral in connection with such agreements.
4. Consummation of material contracts for the purchase or lease of significant assets or services such as the hiring of a payroll service or the purchase of health insurance.
5. The adoption of 401K or SIMPLE IRA pension plans, profit-sharing plans, bonus, and other employee benefit plans.
6. Amendment of LLC bylaws (if any).
7. Review of financial statements and tax returns of the LLC.
8. Appointment of auditors, if any.
9. Any action that requires a member vote listed in the Operating Agreement.
10. The issuance and sale by the LLC of additional interests in the LLC or the repurchase of LLC units by the LLC or members.

In the case of any such actions listed above, the Managing Member of the LLC should prepare minutes of the meeting and indicate what actions were approved or prepare the form of written consent evidencing any such manager or member actions.

If you have any questions about your LLC feel free to call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park at 610-521-0604.

Checklist for Setting Up Your Business After Forming An LLC

Clipboard with checklist
After we form an LLC for your business the next steps are to:

1. Open the New LLC business checking account using the LLC Certificate of Organization and the EIN. When you open the business bank account get the following:

  • Just put your LLC name on the business checks not your address;
  • Put “Void After 60 Days” under the dollar line on the checks and begin with number 1001;
  • Get overdraft protection for your business account;
  • Get your monthly statements and check imagines in the mail or print them out or save them every month to your computer or server.
  • Get copy of your signature card. (Per Uniform Commercial Code Article 3)
  • Get a business debit card that you can use to make business purchases or take draws.

2. Then fill in a W-9 with your LLC name and EIN and give it any one that paid you over $600 so they do not issue you a 1099-Misc. under your SSN for the current tax year.

3. You should hire a payroll company to pay you once per month and set up direct deposit and pay yourself at least $12,000 in 2013 so you can maximize your Simple IRA employee contribution for 2013. I would recommend Ryan Russell of Precise Payroll at 302-530-8410.

4. To maximize your retirement you have until October 1 to open a Simple IRA and then you have until April 15, of the following year to make a $12,000 employee contribution and your LLC can make a 3% of your pay employer contribution. If you can afford to, you should also fund a ROTH IRA or a nondeductible IRA by contributing $5,500 by April 15, of the following year assuming you met the AGI limits. If you can afford to make additional contributions for retirement I can recommend a financial planner.

5. Instead of a Simple IRA you can also consider a 401K and make an employee contribution of $17,500 and have your employer match 10% of that.

6. You should get the following insurance under your new LLC’s name:

  • You should get the preferred group health insurance.
  • You should also get business professional liability insurance and workman’s compensation if you have employees.
  • You should also register your business vehicle registration in your LLC’s name and inform your auto insurer to update your policy and add full tort coverage.
  • You should also get a personal umbrella of at least $ 1,000,000 if not more depending on your personal net worth.
  • You should also get disability insurance and pay the premiums out of your personal bank account so if you have to file a claim the proceeds will be tax free. I would recommend Tim Harris of Nationwide at 610-565-1910 for auto, business, umbrella and disability.

7. You should sign up for a business visa or master card that either pays you cash back or pays you rewards like Pentagon Federal Credit Union 800-247-5626, or Chase Ink 800-882-6751. You should use the card to make all your business purchases so when you receive the yearend detailed statement that will list all your business expenses by category, it will simplify your record keeping and maximize your tax deductions.

8. You should use Microsoft Outlook or Google Calendars to schedule your appointments and track your mileage and cash expenses. Also keep receipts for cash expenses that you can total at year end.

9. If you want to accept credit cards using your smart phone sign up for Intuit Go Payment at 888-486-9795, which has no monthly fees and charges about 3% per transaction.

10. If you hire someone else to reconcile your bank statements and or make deposits make sure they are bonded to prevent fraud. You should also review your annual profit and loss statement and tax returns with your tax preparer looking for any unusual increases in expenses. Finally you should review the cancelled checks every month from the business account to ensure there are no missing checks or suspicious transactions.

11. If you rent or own commercial space consider switching to Direct Energy at 888-734-0741, which will charge you a fixed rate of 8.79 cents per kWh for electricity which includes transmission charges and gross receipts tax.

12. If you pay anyone who is not a corporation more than $600 during the tax year get them to fill in a W-9, before you pay them so can issue them a 1099-Misc.

By doing all the above steps you will follow the three rules that every entrepreneur has which are to:

  1. Pay the least amount of taxes legally by following rules 2 and 3 below;
  2. Maximize your retirement contributions by fully funding both a Simple and Roth or nondeductible IRA;
  3. Practice good corporate governance by not paying personal expenses from the business checking account and keeping good business records and using your business credit cards for all your business purchases. Making sure you have the proper amount of insurance listed in paragraph 6 above.

Feel free to contact Gregory Spadea at Spadea & Associates, LLC in Ridley Park at 610-521-0604 if you have any questions.

What Business Expenses Are Deductible?

If you are self-employed or have an LLC or S-corporation any expense that your business incurs that is ordinary and necessary is deductible under Section 162 of the Internal Revenue Code. Therefore, please list the total spent on the expense categories broken down as follows:

  • Advertising;
  • Car expense (need business miles plus parking, tolls or actual fuel invoices, insurance, repairs and total miles driven and business miles plus parking and tolls);
  • Fixed Asset – If you bought a vehicle, computer, equipment, office furniture or placed it in service during the tax year, even if you already owned it, bring in the purchase invoice so we can expense it under IRC Sec. 179;
  • W-3 – Salaries that your company paid to others. List officer and shareholder salary separately;
  • Employer share of employment taxes like FICA and FUTA;
  • Commissions or fees paid to other contractors, Get them to fill in W-9 if not incorporated so we can issue them a 1099;
  • If you already issued them a 1099, bring in the 1096 – showing total independent contractors paid.
  • Insurance but list health insurance separately;
  • Supplies;
  • Materials or Purchase of inventory for resale;
  • Travel, Hotel, Airfare and Car Rental;
  • Meals (need date, place, person entertained and business purpose) Only need receipt if you pay more than $75.00 and have a day timer, If you do not have a day timer or digital calendar (such as Outlook or Google Calendar) then you need a receipt for everything;
  • Telephone including local, long distance, fax and mobile;
  • DSL, cable and internet charges;
  • Postage;
  • Continuing education and business seminars and conferences;
  • Interest expense paid on business loans and provide year end balances;
  • Rent;
  • Utilities like electricity, oil or gas;
  • Prior year PA franchise (Capital Stock) tax from Page 2 of the PA RCT-101;
  • Prior Year Local Income Tax paid;
  • Total state sales tax paid if you included it in gross sales receipts.

Contact Gregory Spadea at 610-521-0604, if you have any questions or need your tax returns prepared.

What is a Corporation Supposed to do at the Annual Shareholder Meeting?

Businessman Standing at a Podium and Giving a Speech to a Conference Room Full of Delegates
The simple answer is to reinforce corporate formalities.  The regular observance of corporate formalities is an important aspect of maintaining the protections and advantages of being incorporated, not the least of which is the protection of shareholders against personal liability for the financial obligations of the corporation.   Three of the most important areas of corporate formalities are shareholder decision making, director decision making, and separation of corporate assets from personal assets.  For example the corporation should never pay the shareholders or directors personal expenses from the corporate bank accounts.

Federal and state tax returns, employment tax returns, and annual reports and similar filings are also required, depending on where the corporation is incorporated and qualified to do business.   The shareholders should take action to elect the board of directors of the corporation annually. In addition, certain specified fundamental changes in the corporation require the consent or approval of the shareholders, including, but not limited to:

1. Amendment of the Articles of Incorporation.

2. Sale of all or substantially all of the assets of the corporation.

3. Merger or consolidation of the corporation with or into any other corporation.

4. Winding up and dissolution of the corporation.

Matters of more general operating policy should be considered and authorized by the company’s board of directors. Although there is no statutory requirement with respect to how frequently the board of directors should act, it is typical that the board meets at least annually if not quarterly and calls special meetings in which action is required before the next regular meeting.

Matters appropriate for director action include the following:

1. Annual appointment of officers, setting of salaries, and declaration of bonuses.

2. Corporate borrowing and the giving of security in connection therewith.

3. Contracts for the acquisition or lease of significant assets or services or the disposition of assets, or for the rendition of services outside the ordinary course of the business of the corporation.

4. Policy decisions with respect to the corporation’s operating budget.

5. The adoption of pension, profit-sharing, bonus, and other employee benefit plans.

6. The declaration of dividends or the redemption of shares.

7. Amendment of the bylaws.

8. Review of financial statements of the corporation and appointment of auditors, if any.

9. Any action that requires a shareholder vote.

10. The issuance and sale by the corporation of additional shares or the grant of options to purchase additional shares.

Contact a Ridley Park, PA Business Law Attorney at Spadea & Associates, LLC

At the Law Offices of Spadea & Associates, LLC, in Ridley Park, we represent individuals and businesses throughout southeastern Pennsylvania, including Delaware County, Montgomery County and Camden County. We also work with clients in Philadelphia and Burlington Counties.

For a free initial consultation with an experienced business lawyer, call us at 610-521-0604 or e-mail contact us online today.

Learn About the Advantages of Organizing as an LLC

LLC benefits clipboard
Anybody interested in starting a new business, or in formalizing the organization of an existing sole proprietorship, should pay careful attention to the entity selection decisions they will need to make. An experienced business law attorney can guide you through the considerations that will affect your decision to form a C corporation, an S corporation, a limited liability company (LLC), any form of partnership, or stay with a sole proprietorship in your own name.

Though they are relatively new in the United States, LLCs have emerged as a highly popular and flexible way of organizing a new business entity. Virtually unknown in this country 40 years ago, LLCs can be formed today in every state, and in some industries, they represent the standard form of business organization.

Flexibility and Ease of Formation

Although the details vary from state to state, an LLC combines certain features of the business partnership and the business corporation. The personal liability of an LLC’s members is protected in much the same way that a corporation shelters its shareholders from liability. Unlike corporations, however, most LLCs are taxed on a pass-through basis to its individual members. In other words, the LLC pays no taxes on its profits, but each member pays income tax on his or her share.

Perhaps the main advantage of the LLC is its flexibility in organization and management. Corporations and partnerships alike are free to vary many of the state laws related to corporate and partnership governance through corporate bylaws and partnership agreements, but the level of default statutory regulation applicable to LLCs is very limited. An operating agreement defines the rights and responsibilities of the membership, and creating an LLC is as simple as filing a certificate of organization (Pennsylvania) or certificate of formation (New Jersey) together with a modest filing fee.

Unlike corporations, LLCs are not managed by boards of directors with specific duties and responsibilities.  Instead, the management functions of an LLC are spelled out in the operating agreement. When the LLC has more than one member, the operating agreement can also spell out details as to the transferability of interests, rights of first refusal and restrictive covenants with respect to proprietary information, customer lists and noncompetition terms.

Tax Election Options for LLCs

Some entrepreneurs or existing businesses might find the tax characteristics of an LLC to be disadvantageous. Because the LLC itself is not taxed, distributions to members are taxed as ordinary income to the individuals. For most startups, however, this will represent no practical difference from self-employment tax. LLCs can also elect to be taxed in any of several ways: sole proprietorship, S corporation, or if there are multiple members, as a C corporation or partnership. LLCs seeking corporate tax treatment can set up a Simple IRA retirement plan and pay themselves a reasonable salary to reduce some of their self-employment tax that they would incur as a sole proprietorship.

When the primary impetus for organizing as an LLC is to shelter personal assets from business liability, the limited liability company form is hard to beat. Many real estate companies, property investment and management firms set up a separate LLC for each building, to ensure that the tort or contract liability for each project is contained to the asset value of that property. The LLC elect to be taxed as partnerships are taxed with the general partner organized as a corporation or another LLC.

Contact Spadea & Associates, LLC in Ridley Park: 610-521-0604

Any business entity selection and formation decision should be based on your own personal and business objectives, needs and characteristics. The Law Offices of Spadea & Associates works with business owners and entrepreneurs in Greater Philadelphia, southeastern Pennsylvania and South Jersey on matters of business law, tax law and estate planning. To learn more about the ways an LLC could meet your objectives in Pennsylvania or New Jersey, contact us in Ridley Park.

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