Many business owners operate their business as a limited liability company (LLC) due to the personal liability protection an LLC allows. Owners of rental properties also use LLC entities to protect their assets. Why? Because they are smart and because LLCs are not required to adhere to the burdensome formalities and administrative hassles required of corporations.
However, whether you are a full-fledged business or in the business of protecting real estate or other assets, make sure you do it right. Unfortunately, many LLC owners fail to abide by basic operational guidelines and therefore put their assets in DANGER. If you want to maintain an LLC’s personal liability protection, be sure to adhere to the basic operational details.
What Happens If You Don’t Dot the I’s and Cross the T’s?
If you fail to do the basics in operating your LLC, a court can remove the personal liability protection barrier that shields your personal assets WITH A STROKE OF THE PEN! They call is “piercing the veil!” Once the veil is pierced, you and ALL your assets become vulnerable as you are personally liable.
So, what is a savvy owner to do? By implementing and adhering to the following best practices, you can help ensure your company stays in compliance and that your personal assets have the maximum protection possible.
1. Create an Operating Agreement
I hear from LLC owners that an Operating Agreement is not legally required in Colorado. Although that is technically true, it does not mean that it is a smart practice not to have an Operating Agreement. Just because the law does not “require” something doesn’t mean it is not vital or important. Having an Operating Agreement in place provides the essential legal guidelines and framework for how your company will be run and clearly establishes your business as a legal entity separate and apart from you as a person.
You will be glad you have an Operating Agreement with the protection it provides when your creditors, the IRS, or other people that want a piece of your pie, come calling. We can help you create a robust operating agreement that suits the specific needs and circumstances of your particular business.
2. Conduct All Business in The Company’s Name
All business should be conducted in the company’s name. Your company name is the complete business name, including the limited-liability abbreviation (LLC). And do not forget that you never, ever, ever, ever sign a legal agreement in your name. Every legal agreement and every financial transaction should be signed in the name of your LLC. All business material, including business cards, correspondence, invoices, advertising, websites, and social media, should also use the LLC to identify your company. Otherwise, someone can claim that they didn’t know he was dealing with an LLC, sue you, and seek to get into your personal assets.
3. Keep Your Company Banking Separate. Never Mix Personal and Business Funds
As part of setting up an LLC, we obtain an employer identification number (EIN) for you so that you may set up a bank account in the LLC’s name. Your business account should be used for ALL company transactions, including major and everyday purchases. And, it goes without saying that ALL payments to the business should always be made to the company account. Company funds should never be used to pay your personal bills. Commingling personal and business assets are one of the main reasons courts “pierce the veil” of an LLC’s liability protection. For this reason, keeping your company’s finances separate from your own is a top priority.
4. File Regular Reports With The State
Nearly all states require LLCs to file regular reports annually. In Colorado, the annual report is filed with the Colorado Secretary of State and keeps that governing agency apprised of key information and changes to your company’s status. As a business owner, you must ensure that your company’s information is up to date.
5. Hold Regular Member Meetings & Keep Minutes
This is another area where business owners fail, as they have “heard” that LLCs don’t need to have meetings or document what is occurring. While it is true that there may not be a specific law or legal requirement that LLCs hold meetings and keep minutes, these are important for several reasons.
In addition to protecting your personal assets from liability, holding regular meetings with accurate minutes provides strong evidence that your LLC is real and observes the formalities necessary to be treated as a legal entity separate and apart from you personally.
Combined with your operating agreement, regular reports to the state, and diligent separation of personal and business finances, such meetings offer extra protection if creditors ever seek to pierce your corporate veil. Holding regular meetings and keeping detailed minutes makes good business sense, especially for multi-member LLCs. For instance, regular meetings facilitate consensus among members when making major decisions, keep members informed of business actions, and provide a forum to plan for your company’s future.
Meeting minutes also provide a clear record of member discussions, votes, and decisions, which can help reduce member disputes and conflict. Plus, keeping detailed minutes provides solid documentation of your company’s operations should the IRS or courts ever request such records.
We’ve Got Your Back
As your lawyer, we are here to support and assist you with setting up your LLC and teaching you how best to adhere to the necessary formalities. Protection from liability is what we do, whether that be through creating an LLC or a trust. Our brightest clients have both. Do you know why? It is to ensure the maximum level of liability protection is in place. Contact us today to learn more.