Frequently asked questions
What is a LLC?
A LLC is a limited liability company. In a LLC, the owners are called members and have a percentage interest in the assets and income of the company. The members can either manage the company themselves or appoint one or more persons to be the managers of the company. In this way, a LLC looks a lot like a partnership. The big difference is that the partners in a partnership can be held liable for the debts and liabilities of the partnership; the members of a LLC in most instances cannot be held liable for the debts and liabilities of the company.
Have LLCs always been around?
A limited liability company is a relatively new form of business entity – only being adopted by statute in most states in the 1990s. Connecticut adopted its first Limited Liability Company Act in 1993. Prior to that, a business owner would have to form a corporation or only be a limited partner in a limited partnership (and not active in the business) in order to obtain the same liability shield. The limited liability company allows the owners to be directly involved in the operation of the business but to have the same liability shield as shareholders in a corporation.
I operate my business all by myself- why do I need to form a LLC?
If you operate your business by yourself, you are what is called a sole proprietor. As a sole proprietor, you are personally liable for the debts and obligations of the business. That personal liability includes any contracts for services or goods and any judgments against the business. As a sole proprietor, it will be your name on the lawsuit. A creditor can recover his judgment against you from your personal assets. Connecticut only has limited asset protection. On the other hand, if you form an LLC, then you as member are not generally personally liable for the debts and obligations of the LLC. This is called the liability shield.
So all I have to do is form the LLC to obtain the liability shield, right?
No! It is very important to operate the LLC in the proper way or the liability shield will be vulnerable to challenge. For example, it is important to maintain a strict separation of your personal finances and the finances of the business. As a first step it is vital to have a separate bank account for the business. The best practice is to have a different bank for your personal accounts and your business accounts – that way you are less likely to confuse the accounts. In addition, keeping all of the required registrations current and maintaining your company’s minute book are other important aspects of properly operating a LLC.
What is a minute book?
A minute book is where you keep your company’s documents and records. These include the Certificate of Organization and Confirmation of Filing, your operating agreement, any federal filings (such as your EIN number), state filings, and minutes of your members’ meetings.
The minute book also provides evidence of the separate existence of your company. Even if you are a sole member LLC, it is a good idea to have an operating agreement (drafted to suit a single member LLC) and to make entries in your minute book outlining important decisions (such as entering into a new lease or undertake a major new project that requires outside funding).