02 Nov 2012

Do It Wrong and your Limited Liability Company will Not Protect You

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There’s a reason it’s called a “Limited” Liability Company and not a “No Liability” Company. But just calling yourself an LLC and filing your articles of organization isn’t enough. If something goes wrong, that LLC alone won’t be enough to protect your personal assets. In fact, you may have completely overlooked creating an operating agreement, especially if you filed your own paperwork or hired a low-cost agency via the Internet.

Sure, there are advantages in LLC ownership, namely that there is flexibility in management and profits and losses can pass directly through to the owner’s personal income tax return while personal assets are shielded from liability. But if you don’t operate the LLC as a real and separate business, you may be asking for trouble.

You’ve likely heard the term “piercing the corporate veil.” When a disgruntled employee, customer, or anyone else who wants a piece of your pie chooses to sue you, that corporate veil is what protects your personal assets. However, if the court finds that you disregarded the corporate form, you’ll be left wide open.

Here are some things a court may consider:

  • Did you disregard LLC formalities?
  • Did you provide enough capital to run the business or remove capital, leaving the LLC bone dry?
  • Did you use the LLC bank account as your personal piggy bank?
  • Do you and your LLC share phone numbers, address, etc.?
  • Were your decisions to benefit you or the LLC?
  • Did you personally pay or guarantee the debts of the LLC?

So what can you do to protect your company’s limited liability? Keep your LLC papers and actions organized as if someone was looking over your shoulder. Make sure that you separate your personal stuff and your LLC: keep separate bank accounts, pay your business expenses from your LLC’s account, do not put personal funds in the LLC account, and do not use LLC funds for personal expenses. Set a percentage ownership for each owner and distribute profits accordingly, or draw an annual salary for each owner of the LLC.

By keeping everything very black and white, you’ll protect yourself and your LLC. Treat your company like the precious creation it is; it may surpass your own expectations in the long run, and such rewards are priceless.

 

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