Why forming an LLC just isn't enough

I was catching the start of the NFL Playoffs this weekend when my friend told me about a business he had just started. "Jared," he said, "it's going to be great. I already have seven clients all over town, and it's only been a couple of months since I opened." I had to admit, I was impressed. So, turning my attention away from football, I asked him, "What kind of business are you in?"

"I'm in the dog business," he explained.

Oh boy, I love a good dog. Well, Golden Retrievers to be exact—but that's a topic for another day. Don't try to tell me that puppy in the photo isn't cute. I digress. Since it was now a commercial break, I leaned in, curious to learn more.

"So, uh, I'm assuming you have an LLC and all that?" I asked.

"Why yes," he replied. "I set up my LLC, created a Google landing page, and built my website."

"That's awesome! You gotta send me the link," I said. But when I asked him about other documents in his corporate file, I was met with a blank stare—a look I’ve become all too familiar with when talking to people who are just starting their own ventures.

I’ve been fortunate enough to help people start their businesses, but to my surprise, many have no idea what a corporate file is. The typical response is something like, “Corporate? File? Boring.” And don’t get me wrong—when you’re launching a company, you’re juggling so many competing priorities that compiling these documents is probably the last thing on your to-do list.

But here’s the thing: the importance of having and maintaining a corporate file comes down to two words: asset protection.

There is advice out there (and unfortunately I've read it) that mentions how simply forming a business will protect your personal assets from any business mishaps. And while that’s true to an extent, these same gurus often leave out a very critical piece of information: piercing the corporate veil. Unfortunately, there are scenarios in which creditors can come after your personal assets by arguing that your business isn't truly separate from you. One of the key ways they can do this is by pointing to your corporate file—or lack thereof—to show that you didn’t set it up correctly.

So, when my friend asked me what he needed, I gave him this list:

1. Articles of Organization

2. Operating Agreement

3. Employer Identification Number (EIN)

4. Federal, State, & Local Tax Documents

5. Bank Account Documentation

6. Accounting Records

7. Annual or Periodic Reports (if applicable)*

8. Business Licenses and Permits (if applicable)*

9. Insurance Policies

10. Employment Documents (if applicable)*

11. Corporate Meeting Minutes

I explained to my friend that in order to maintain his LLC’s liability shield, he must treat his LLC as a distinct legal entity. Remember, the purpose of all these documents is to show that his business operates separately from his personal life and that he does not comingle the two. Keeping that distinction, especially by maintaining his corporate file, is well worth the time & effort. It's as the saying going, "an ounce of prevention is worth pound of cure."

And finally, here is where I'll put in a disclaimer and say, it's highly advisable to have legal counsel guide you through this process. But my hope is that you now know which documents you will need to include when you start your own venture. Good luck!

Thanks for taking the time to read this week's article. If you enjoyed it or even if you didn't, I'd love to hear from you. Drop me a comment or email!

*No, I didn't actually say (if applicable). I wrote this article with many different businesses in mind. Some businesses won't have these documents in their corporate file simply because they don't need them! For example, a company without employees won’t need employment documents. You get the idea.