An LLC, by offering a less complex business structure than a corporation, often appeals to small business owners. An LLC, as far as taxes for small business owners are concerned, is a pass-through entity. This means that the P&L for an LLC are reported on the tax returns of the owner just as in a sole-proprietorship. However, an LLC, like a corporation, often prevents creditors and litigators from pursuing the personal finances of the business owners to make any payments.
What Your LLC Provides Liability Protection From
An LLC typically protects a business owner from all claims made against his business. Only the LLC and its assets are available to satisfy claims or debts. The LLC typically holds in most situations, but what many business owners using LLCs to protect their assets don’t realize is that there are certain things they can do that can actually render their LLC ineffective when it comes to protecting their personal finances.
What you need to avoid
These are the most common ways in which the owner of an LLC can lose the liability protection the LLC would normally provide:
· Failing to follow the rules of an LLC: An LLC must follow all laws and regulations that pertain to the company in order to maintain its status as an LLC. These rules may not be quite as stringent as those that govern corporations, but they still require careful documentation. Make sure to enlist the aid of your business attorney to draft an operating agreement. Additionally, document and track all business decisions.
· Using the business for illegitimate purposes: If you engage in any criminal activity or serious misconduct, your LLC may be lost and as owner you may be help personally responsible.
· Mixing Business & Personal Finances: It may be tempting to do to save time, but mixing your own personal bank accounts with those of an LLC can mean they may be construed as part of the LLC and therefore not subject to liability coverage.
· Failing to use the proper legal name in contracts & communications: The name of the LLC itself must be used on all communications and contracts, not the name of the owners. Ensuring the proper legal names are properly used in all documentation and contracts is an important step in preserving your LLC’s ability to protect your liability.
· Under-capitalizing your business or personally guarantee a debt: Either situation can result in financial obligations your LLC cannot protect you from. In the event your LLC defaults, anything you personally guaranteed you would still be accountable for.
Still have questions?
Please call us for a free appointment with Miami business attorney Yoel Molina in our Miami office at 305-548-5020.