One of the most basic advantages of having a formal business entity for entrepreneurs is liability protection. Most business owners would rather focus on running their business instead of stressing out about the formalities of their business entity. However, certain formalities are necessary in order for business entities to shield the owners from liability. Traditionally, the corporation was the entity of choice among business owners concerned with limiting their liability. A disadvantage of corporations is that the limited liability shield may be lost if the corporation's owners fail to follow strict formalities, such as holding organizational, annual, and special meetings. The limited liability company (LLC) has become very popular because it combines the limited liability of a corporation without the same strict corporate formalities. Holding meetings is an important part of owning an LLC but it is not a requirement. Additionally, a failure to hold these meetings will generally not result in a loss of liability protection.
LLC Meeting Requirements
Although there is no statutory requirement for LLCs to hold meetings, it may be required by the LLC’s organizational documents. An LLC’s organizational documents typically include articles of organization, also known as a certificate of formation, and a company operating agreement. The articles of organization or certificate of formation is the document that is filed with the state to officially create the LLC. The company operating agreement is an agreement among the owners of the LLC and is the company’s governing document. Generally, a failure to hold meetings will not result in a loss of liability protection unless it is required by one of these organizational documents. In that case, it is important to comply with these provisions. However, the owners of an LLC can always amend the organizational documents if they decide meetings are too burdensome.
LLC Member Consent in Lieu of Meetings
Where organizational documents contain a requirement for meetings, there is usually an alternative that will satisfy this requirement. The alternative is called a unanimous written consent in lieu of meeting. Rather than holding a meeting, the owners of an LLC, also known as members, can draft a document detailing the actions they wish to take on behalf of the LLC. Each of the members must sign this document in order to satisfy the meeting requirement. This document then becomes a substitute for holding a meeting.
Piercing the Corporate Veil
The main way in which an LLC can lose its liability protection is through a lawsuit that seeks to “pierce the corporate veil.” This descriptive language refers to a creditor’s ability to pierce the liability shield of the LLC and hold individual members personally liable for the LLC’s wrongful actions. Although fraud and commingling of personal and business assets are the main factors considered by courts in veil piercing litigation, failing to observe company formalities (such as holding meetings) has also been an important factor in determining whether to hold members personally liable.
LLC Best Practices
Despite the lack of a statutory requirement for LLCs to hold meetings, there are plenty of reasons why members of LLCs should hold meetings and keep accurate records of such meetings. One reason is to facilitate discussions among members before making major decisions such as electing managers, issuing dividends, and admitting new members. Another reason is to keep all members informed and up-to-date on actions taken by the LLC. Most importantly, holding regular meetings with accurate records is evidence that the LLC is observing company formalities. It also provides a clear record of discussions, votes, and actions taken by the LLC should a dispute arise among the members.
Record decisions made by members of your limited liability company with Nolo's Minutes of LLC Meeting.