This is the most dangerous myth in small business law. While Limited Liability Companies (LLCs) have fewer requirements than C-Corporations, they are not devoid of rules. If you are now being sued—whether by a creditor, an injured customer, or a disgruntled partner—your failure to maintain these formalities can destroy your defense.
If a judge sees a messy, undocumented business, they see an easy target for personal liability.
What Are “LLC Formalities”?
Unlike corporations which require rigid annual shareholder meetings, LLC formalities are largely defined by your Operating Agreement. However, general expectations include:
- Separate Bank Accounts: Absolutely non-negotiable.
- Documenting Major Decisions: Loans, real estate purchases, or adding members must be recorded in written resolutions or minutes.
- Operating Agreement Compliance: If your own agreement says, “Members will meet quarterly,” and you never met, you have breached your own contract.
- Adequate Capitalization: keeping enough money in the business to pay bills.
The “Sloppy Administration” Defense Crisis
You are being sued. The plaintiff argues that because you didn’t keep minutes or sign resolutions, your LLC is a fake.
What can we do?
If you are already in the middle of a lawsuit, we cannot fabricate documents backdated to 2019. That is fraud. However, we can use the doctrine of Ratification.
Current members can hold a meeting now to review past actions. You can pass a resolution stating: “The Members hereby review the actions taken by the Managing Member on [Date] regarding the purchase of the van, and fully ratify and approve said action as an act of the Company.”
This cleans up the record. It shows the court that while you may have been informal, the actions were authorized business decisions, not personal whims.
Reviewing the Operating Agreement
Often, the problem isn’t just what you did, but what your document says you should have done. Many business owners download generic templates that require complex annual meetings they never intended to hold.
As part of your defense strategy, we review your governance documents. If your actual practice differs from the document, we may need to amend the Operating Agreement to reflect reality, ensuring you aren’t constantly in breach of your own rules. This is a core part of our corporate governance review services.
The Single-Member LLC Vulnerability
Single-member LLCs are at the highest risk. Because you are the only owner, it is incredibly easy to treat the business wallet as your personal wallet.
Community Insight: Many entrepreneurs struggle with this balance. This Reddit thread on LLC upkeep highlights the common confusion—and the risks—of ignoring paperwork.
In court, we have to work harder to prove the “separateness” of a single-member entity. We rely on tax returns, invoices, and contracts signed explicitly in the name of the LLC (e.g., “John Doe, as Member of Doe LLC” vs just “John Doe”).
Fix It Before It Breaks
If you are being sued, do not hand over your messy shoebox of receipts to the plaintiff’s attorney. You need a lawyer to organize, ratify, and present your business records in the best possible light.
Better yet, if you haven’t been sued yet, contact a LLC formation and maintenance attorney to perform a “health check” on your corporate book. An afternoon of paperwork now can save your personal fortune later.
