Single Owner/Member LLC -Are you sure your liability is limited?
Congratulations. You’ve filing the Articles of Organization with the Secretary of State and formed a Limited Liability Company (“LLC”). That means you have successfully protected yourself and your assets from liability, right? … well, maybe you have.
Many people don’t realize that it is what they do after the company has been formed that ensures liability protection for a new LLC. If the LLC members do not follow certain compliance requirements, it will not be difficult for creditors to “pierce the veil” and reach the LLC member’s personal assets.
Here is a list of important things to keep in mind and steps to take to ensure you are maximally protected.
In California, both single- and multiple-member LLCs are required to have an Operating Agreement, either written or verbal. Yes, if you are a single member, you need an Operating Agreement for your company. Operating Agreements spell out the organization of your company and are important even if you fill all of the responsible positions of the company.
Do not EVER use your personal bank account for your LLC’s operational finances. Always ensure that you have a separate bank account solely for your LLC.
Do not EVER co-mingle your personal and LLC funds. If you must use your personal funds to finance the company, it is best to transfer the funds into the LLC account and enter the deposit as a capital contribution or loan on the company’s books.
Do not EVER deposit money/revenue from your company’s customers into your personal bank accounts, even if you are repaying yourself. Ensure that you always go through your company’s accounts with incoming revenues.
Always ensure that when you are signing contracts on the company’s behalf, that you include your title (“Manager” if manager-managed; “Member” if member-managed) along with your name (e.g. “Jane’s Cookies LLC by Jane Doe, Manager). If you just use your name, you are increasing your risk of personal liability.
Do not EVER take money or property from your company without properly documenting its purpose. Ensure that you properly log loans as loans, compensations as compensation, and so forth.
Do not EVER use a name that is not the name in your company’s Articles of Organization unless you file a fictitious business name (DBA). For instance, do not do business as “Jane’s Cookies” instead of “Jane’s Cookies LLC” unless you register this shortened business name with the state.
Avoid using your personal name when marketing your company. Associating your name as an equivalent with your company only serves to loosen your liability protection.
I recommend filing an Employee Identification Number (“EIN”) even if you are taxed as sole proprietor and have no employees. If you are a sole proprietor with no employees, you are not required to obtain an EIN, but that means that you will need to use your social security number for tax purposes, which you probably want to avoid.
Add your spouse or partner as an additional owner/member. Single Members in most states do not have charging order protection, but members of multi-member LLCs do. So, you and your spouse or partner as members of the LLC may qualify for charging order protection. Don’t issue your spouse a 1% ownership interest, though. My advice: not less than 20%.
We highly recommend you consult with a Los Angeles business attorney in in setting up your limited liability company.
About the Author:
Dallas P. Verhagen is a business attorney and a partner at Verhagen | Bennett LLP. To learn more about Dallas, please click here.
For questions or comments about this post, please email Dallas directly at: Dallas@VerhagenBennett.com
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© 2017 Dallas P. Verhagen — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.