5 Best Practices To Ensure Liability Protection From Your LLC
Updated: Apr 5
Many business owners structure their business as a limited liability company (LLC) because like corporations, LLCs offer personal liability protection for their owners. But unlike corporations, LLCs are not required to adhere to many of the same burdensome corporate formalities required of corporations.
Since LLCs offer the liability protection of a corporation, without all of the administrative hassles, this entity might seem like the best of both worlds—and in many ways, it can be. But things are not nearly as cut and dry as they might seem when it comes to abiding by an LLC’s administrative formalities.
Although the administrative requirements for an LLC are far less complex than those for a corporation, you will still need to abide by some operational guidelines if you want to maintain your personal liability protection. If you fail to adhere to these formalities, a court could remove the protective barrier shielding your personal assets, known as “piercing the veil,” leaving you personally liable to creditors.
While the formalities required for LLCs vary by state, implementing and adhering to the following five best practices can help ensure your company stays in compliance, your veil remains intact, and your personal assets have the maximum protection possible.
1. Create An Operating Agreement
Though most states do not legally require LLCs to have an operating agreement, you must have one in place, even if you are the sole owner. An operating agreement provides the essential legal guidelines and framework for how your company will be run, and it clearly establishes the business as a separate legal entity.
Among other functions, an operating agreement details how the ownership, responsibilities, and profits are divided among the LLC owners (known as members); it establishes how the company will be managed, and it outlines how the company is to be dissolved or sold. We can support you in creating and maintaining a robust operating agreement that suits the specific needs and circumstances of your particular business.
And if you have partners, negotiating your LLC operating agreement is an absolutely critical part of creating a strong relationship that can withstand the test of time and deal with any potential conflicts that may arise down the road.
2. Conduct All Business In The Company’s Name
All business should be conducted in the company’s name, not your own, and this includes adding your chosen limited-liability abbreviation to your company name. This also means using the company letterhead on all correspondence, identifying your company on websites and social media, and naming the company as a party in all legal agreements, as well as when making all financial transactions.
Never, ever, ever, ever sign a legal agreement in your own name. Every legal agreement should be signed in the name of your LLC. And while you are at it, never sign a legal agreement without having an experienced business lawyer (us, naturally) review it.
3. Keep A Separate Company Bank Account, and Never Mix Personal And Business Funds
As soon as possible after filing your LLC formation documents and getting your employer identification number (EIN), you should set up a bank account in the company’s name. This account should be used for all company transactions, from making major purchases from vendors to buying everyday office supplies.
Additionally, payments to the company should always be made to the company account, not a personal account, and 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.
That said if you have already “commingled” personal and business finances, call us so we can help you address this issue and put in place financial systems that will make separating your finances a snap.
4. File Regular Reports With The State
Nearly all states require LLCs to file regular reports—generally on an annual basis—with the state agency responsible for registering business organizations. Such reports keep the governing agency apprised of your company’s status, and they are sometimes called a “Statement of Information.”
Each state has different rules on how often and when a report needs to be filed, what filing fees must be paid, and if other documents need to be filed with the report to address key changes to your LLC. We have processes that can help keep you up-to-date on your state’s latest reporting processes and requirements to ensure your filings are always made on a timely basis.
5. Hold Regular Member Meetings & Keep Minutes
Although very few states legally require LLCs to hold member meetings and keep minutes, doing so is important for several reasons. Most importantly, holding regular meetings with accurate minutes provides strong evidence that your LLC is serious about observing administrative formalities. 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.
Outside of protecting your personal liability, holding regular meetings and keeping detailed minutes just makes good business sense, especially for multi-member LLCs. For instance, holding regular meetings facilitates consensus among members when making major decisions, keeps members informed of business actions, and provides 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 Have Got Your Back
As your family lawyer, we will support and assist you with maintaining your LLC’s business records and adhering to corporate formalities, including holding meetings and keeping minutes. In fact, we offer specially designed maintenance packages to help ensure your LLC meets these requirements and maintains the maximum level of liability protection for your personal assets. Contact us today to learn more.
This article is a service of Reflections Life Planning LLC. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That is why we offer a Family Wealth Planning Session, during which you will get more financially organized than you have ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.