Chapter 5 Operating the Company - LLC Operations Manual

Sections 5.1 – 5.7 explain the post-formation tasks that all LLCs should accomplish as soon as possible after filing the Articles of Organization.

Section 5.1 Get an IRS Employer Identification Number for the LLC

Although an LLC may be able to avoid getting an IRS Employer ID number (EIN) if it does not have any employees, we recommend that all LLCs get an EIN for the LLC unless the LLC will never have income, expenses or money to deposit into a bank account. If your LLC will not have employees it can open a bank account in its name, but the bank will require the social security number of a member.

Your LLC needs an EIN if: (i) it started a new business, (ii) hired or will hire employees, including household employees, or (iii) intends to open a bank account. Any member or manager of the LLC that is a person can use the wizard to get an EIN for the LLC.

The primary reason to get an EIN for your LLC is so that no member has to give the member’s social security number to third parties. If your LLC does not have an EIN and it hires an independent contractor, the contractor will ask for the LLC’s EIN so it can send the LLC an IRS Form 1099. If the LLC does not have an EIN it would then be required to give the independent contract the social security number of one of the members of the LLC.

It is actually very easy to obtain an EIN for an LLC by using the IRS’ online EIN wizard. You answer several questions and within five minutes your LLC’s new EIN is displayed on your screen. Be sure to print the screen with the new EIN and write the number down and put the EIN in a safe location.

If you lose your EIN, call (800) 829-4933 and select EIN from the list of options. Once connected with an IRS employee, tell that person that you received an EIN from the Internet but can’t remember it. The IRS employee will ask the necessary disclosure and security questions then give you the number.

If you hired us to get your LLC’s EIN, it is actually easier for you to complete the IRS’ online EIN wizard to get the EIN yourself than it is to fill out IRS Form SS-4. We cannot get the EIN unless a person associated with the LLC fills out the Form SS-4, signs it and sends it back to us.

Your LLC’s responsible person must complete and sign and return an IRS Form SS-4 to us before we can get the EIN. If you purchased a Silver or Gold LLC package or if you purchased a Bronze LLC package and paid extra for us to get the LLC’s EIN, a member or manager of the LLC must go to our web page called “IRS Form SS-4” and follow the instructions. This page explains how to complete the IRS Form SS-4 and return it to us. The SS-4 form authorizes our legal assistant to contact the IRS on behalf of the LLC and apply for the EIN.

5.2 Open a Bank Account in the Name of the LLC

If the company expects to have revenue or if it will pay expenses, it must open a bank account in its name. Unlike corporations, there are few legal formalities that an Arizona LLC must follow. One very important legal formality, however, is that the company establish its own separate bank account. It is also very important that the company deposit all of its revenue and capital contributions from members into its bank account and that it pay all of its expenses from its bank account. The members should not commingle their money with the company’s money or pay their expenses with the company’s money. A company that does not maintain its own bank account or that commingles its money with members’ money or pays members’ expenses from its funds risks having a creditor “pierce the company veil” and hold the member(s) liable for the company’s debts.

To open a bank account the company needs two items, an EIN (or the social security number of the member if the LLC is a single member LLC) and a copy of the filed Articles of Organization with the ACC’s received stamp on it. Some banks may also ask for a copy of the company’s Operating Agreement.

5.3 Have all Members Sign an Operating Agreement

Although Arizona LLC law does not require that the members of an Arizona LLC sign an Operating Agreement, we recommend that all Arizona LLCs have an Operating Agreement signed by all of the members. Without a signed Operating Agreement how can the members prove the share of the LLC owned by each member? If one or more members are to contribute money or property to the LLC then member(s) their obligation to contribute must be set forth in the Operating Agreement. Arizona LLC law says that a person is not obligated to contribute money or property to the LLC unless the member agrees to do so in writing.

To learn more about the very important document read my articles called “Your LLC Needs an Operating Agreement” and the “Arizona LLC Operating Agreement FAQ.”

Section 5.4 Books and Accounting

As a matter of sound financial practice, the company should keep accurate financial books and records. Unless somebody in the company has accounting or bookkeeping experience and will keep the books, I recommend that the company purchase QuickBooks software to keep its financial books. The installation process allows you to set up a chart of accounts typical of the type of business.

Unless the company will not write many checks, I also recommend that the company purchase preprinted checks and that it print all checks directly from QuickBooks. Once you configure QuickBooks and if you use it to write all checks, the company will have accurate financial books and outside accounting expenses, if any, will be greatly reduced because the company merely gives its accountant a copy of its QuickBooks file, which the accountant can use to easily prepare any tax returns for the company.

Section 5.5 Hire an Accountant

Proper accounting and bookkeeping is critical both for financial and tax reasons. Whether the company engages in an active business with employees or simply holds title to one rental home, the company must keep proper books and records. Your company’s financial life will be much simpler and less costly if the company hires an experienced accountant from day one to:

a. Assist in setting up a good bookkeeping system with a good accounting software program like QuickBooks,

b. Advise the company within the first 75 days after its formation as to which of the four possible methods of federal income tax (disregarded entity, partnership, C corporation or S corporation) is best for the company and its members,

c. Prepare and file the proper IRS form to elect the method of taxation that is best for the company and its members;

d. Answer bookkeeping and accounting questions from time to time during the year to avoid bookkeeping errors,

e. Prepare and file any required federal and state tax returns.

An all too common method of bookkeeping is the box method where all records and receipts of income and expenses are keep in a box and given to the accountant a week before the due date of the tax return. Accountants hate this method and will charge you more for their services because of the disorganization and the extra time needed to clean up the mess.

The best method of bookkeeping is one that is maintained on a good software program that is overseen by an accountant. Your accountant will reward you with a lower fee when all of your yearly records are in proper order and given to the accountant on a CD as a computer file rather than a mass of unorganized papers in a box.

Section 5.6 Accountants Recommended by Richard Keyt

If you need a referral for a good Arizona Certified Public Accountant, see “Professionals We Like.” Every LLC that has substantial income or expenses must consult with a good CPA and use him or her to prepare the LLC’s federal and state tax returns.

We also recommend that you hire a good bookkeeping service to go over your QuickBooks data on a regular basis and keep it up to date with income and expenses allocated to the proper QuickBooks accounts. For many years KEYTLaw, LLC, has used the bookkeeping services of Joy Tuttle, CPA, of CPA for Hire, P.C., 33755 North Scottsdale Road #130, Scottsdale, Arizona 85266; Phone 480-437-9022 to keep our QuickBooks accounting data in proper order.

Although Joy is a CPA, she and her company do not provide CPA or tax preparation services. CPA for Hire is a QuickBooks and bookkeeping consulting firm. They can do some or all of your actual QuickBooks data entry either remotely over the internet or by sending a bookkeeper to your office. Once a month a CPA for Hire bookkeeper comes to our office and reviews our data entry for the prior month and corrects any data entry errors we have made. If we are not sure how to handle a bookkeeping item at any time, we call our CPA for Hire bookkeeper for the answer.

Once a year shortly after the end of the calendar year Joy Tuttle reviews our books for the just ended year and makes sure everything is ready to give our QuickBooks file to the CPA who prepares our tax return. I highly recommend that you use QuickBooks for small business accounting and CPA for Hire as your part-time professional bookkeeper.

Section 5.7 Recordkeeping Requirements

Arizona Revised Statutes Section 29-3410.A requires all Arizona LLCs keep all of the following records:

a current list of the full name and last known address of each member and manager.
a copy of the Articles of Organization and all amendments to the Articles of Organization.
a copy of all current and prior written operating agreements and amendments to all current and prior written operating agreements.
any record of a member’s obligation to make a capital contribution to the company.
a copy of the company’s federal, state and local income tax returns and reports, if any, for the three most recent years.
a copy of the company’s financial statements, if any, for the three most recent years.

Section 5.8 Members’ Right to Inspect Company Records

Arizona Revised Statutes Section 29-3410.B law also gives each member or manager of the company the right during regular business hours and at a reasonable location specified by the company, to inspect and copy the records described in subsection A stated in the preceding Section 5.7 and any other company record regarding the activities, affairs, financial condition and other circumstances of the company as is just and reasonable if all of the following apply:

the member or manager seeks the records for a purpose reasonably related to the rights and duties of the member or manager under the operating agreement or this Chapter.
the member or manager makes a demand in a record received by the company describing with reasonable particularity the records sought and the purpose for seeking the records.
the records sought are directly connected to the member’s or manager’s purpose.

Section 5.9 How the Company Should Sign Contracts

When entering into contracts, use care to indicate that the contracting party is the LLC. The company’s legal name must appear in the beginning of the contract where the parties names are set forth. Make sure the LLC’s full legal name appears as the contracting party. For example, if the LLC were named World Wide Widgets AZ, LLC, then it should be designated as a party to the contract in this way: World Wide Widgets AZ, LLC, an Arizona limited liability company.

The failure properly designate the LLC as a party to the contract, including in the signature block where the LLC’s representative signs, could cause the signer to become legally liable as the party to the contract.

The following examples illustrate how the signature block for World Wide Widgets AZ, LLC, on legal documents should appear depending on whether the Manager is a person, a company or a trust:

MEMBER MANAGED SIGNATURE BLOCK WHEN A MEMBER IS A PERSON