Part 7 – The 8 Bad “D”s of LLCs

By Jeffery S. Watson

This is the seventh in a series of emails discussing eight bad “D”s to consider when drafting an operating agreement for an LLC.

7. DEBT

Too much debt will cripple or kill a company. An LLC operating agreement needs to contain clear language, which is agreed to in advance by all members, as to how much debt the LLC will take on and what form or manner of debt is acceptable. This is so important because two common causes of business failure are (1) taking on too much debt and not being able to pay that debt with the income from the LLC, and (2) inadequate bookkeeping and tax records which result in tax liabilities that put the LLC out of business before it really had a chance to get going.

Owing back taxes is another form of debt that the LLC needs to be aware of and must plan for. As an owner of an LLC, you must be aware of all the tax obligations you have with your employees. I have seen businesses start out with a big splash, lots of employees, and lots of excitement and sales, but when it came time for the 941 payroll tax returns to be filed, they didn’t have the money to do so and ended up in trouble. Make sure all aspects of the LLC’s finances have been discussed with all members.

If you have missed any of the previous emails in this series, you can visit WatsonInvested.com, click on the “Articles” tab at the top of the home page and find them there.

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Until next time,

Jeffery S. Watson