A Limited Liability Company (LLC) is a legal business entity that not only provides favorable tax consequences for some individuals; it also protects owners or members from personal liability. The legal term for this protection is the “corporate veil”. This corporate veil creates investment incentives. An investor is more likely to spend time and money based on the assurances that she will not be held personally liable to the business’ creditors. However, many times a plaintiff suing an LLC or a corporation will attempt to go after the personal assets of owners. This is known as piercing the corporate veil.
If a court imposes personal liability on the owners, then creditors are able to go after the owners’ homes, bank accounts, investments, and other assets to satisfy the corporate debt. To protect you from personal liability, I recommend doing these three things.
1. Have the Proper Mindset
You are not your business, and your business is not you. Your business must operate as a distinct business entity, which means you must separate your personal being from your business “being”. This concept may be difficult for some businesses and especially single member LLCs to comprehend, since these individuals businesses have given up so much of their time, assets, family life, and other sacrifices to not only get the business up and running, but to keep it running on a daily basis. However, by following the suggestions listed below, you will maintain your business as a separate legal entity in the eyes of the court; and therefore be much less likely to be held personally liable should your business ever get sued.
2. Keep Your Money Separate
Your business’ money is not your money. Don’t commingle your business’ money with yours, and don’t use your business money for non-corporate purposes. These reminders are mostly common sense, and easy to keep in mind.
- Opening and maintaining a separate checking and savings account.
- Obtaining credit cards in the business’ name,
- Don’t use these accounts to buy your own groceries, or other non-business items.
- To pay yourself, write a check from your business account.
- If you loan money to your business, don’t repay yourself in preference to other creditors.
- Don’t use your corporation’s assets as your own.
- Don’t personally guarantee loans to your business.
Courts will also look at the way your business is capitalized in determining on whether or not to hold you personally liable. Don’t leave $2 in the business checking account at the end week, while you take home the rest. Make sure that there is enough money in your business accounts to adequately keep your business operational and capitalized.
Keep your money and your business’ money separate and apart.
3. Maintain Corporate Formalities
Having an operating agreement will help you avoid personal liability.
Some corporate formalities include holding annual meetings with members, and keeping accurate detailed minutes of those meetings. As well as, adopting company bylaws and making sure the members and managers abide by those bylaws.
Operating Agreements are a good thing since they give direction, governance, and assign roles to the owners. However, in a small or single member LLC many of the formalities listed above may not make much sense. If this is the case, draft an Operating Agreement that best fits your business situation.
It is better to write down that you are not going to do certain things, and never do; then to have something written down stating that you were going to do those things, and never did.
Follow these 3 tips and you’ll stay in business for years to come.
This article is for informational purposes only and does not constitute legal advice about your case or situation. There may be exceptions to the information outlined above. Please consult an attorney if you have specific questions about your business.Follow me on social media: