Corporate veil
Business Planning

5 Tips From A Lawyer For Keeping Your LLC Compliant

Many entrepreneurs 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 legally required to adhere to many of the same corporate formalities required of corporations.

Given that LLCs offer the liability protection of a corporation, without all of the administrative hassles, this business entity might seem like the best of both worlds—and in many ways it can be. However, things aren’t 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 strict than for a corporation, you’ll still need to abide by some operational formalities if you want to maintain your personal liability protection. If you fail to adhere to such formalities, a court could remove the protective barrier shielding your personal assets, known as “piercing the veil,” leaving you personally liable to creditors, in the event of a judgment.

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.

1. Conduct All Business In The Company’s Name

To make people aware that they’re dealing with an LLC and not an individual, all business should be conducted in the company’s name, including adding your chosen limited-liability abbreviation. This means using the company letterhead on all correspondence, identifying your company on websites and social media, naming the company as a party in all legal agreements, as well as making all financial transactions in the company’s name, not your own.

2. 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 EIN, you should set up a bank account in the company’s name. This account should be used for any and 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 for personal bills or purchases.

Commingling of personal and business assets is one of the main reasons a court would “pierce the veil” of an LLC’s liability protection. With this in mind, keeping your company’s finances separate from your own is of the utmost importance, and we can help you put in place financial systems that will make this a snap.

3. Create An Operating Agreement

Though most states don’t legally require LLCs to have an operating agreement, it’s vital that you have one in place, even if you’re 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 partnership relationship that can withstand the test of time and potential conflicts.

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 and Keep Minutes

Although very few states legally require LLCs to hold member meetings and keep minutes, doing so is important for a number of 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. 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 organization’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 the LLC’s internal operations should the courts or IRS ever request such records.

Enlist Our Support

As your Family Business Lawyer™, we can 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.

In addition to our maintenance packages, your business could also benefit from our LIFT Personal Business Records Binder, which can not only be used to keep your key business records in order, but it’s also a guide to keep you from leaving anything important out. Armed with this resource, you can be confident that you’ve got everything you need in one place, and it will make all your financial and tax-related work go that much more smoothly.

Be sure to ask how you can get your LIFT Personal Business Records Binder, and how you can best use it to keep all your most important documents in order. Contact us today to schedule your appointment.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

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corporate veil
Business Planning

3 Ways to Ensure Your Company’s Corporate Veil is Never Pierced

Setting up your business as a corporation or limited liability company (LLC) is a crucial way to protect your personal assets from debts and other liabilities incurred by your business.

The ability of a corporate entity, such as an S Corp or LLC, to separate and safeguard your personal assets is often referred to as creating a “corporate veil.” When properly created and maintained, the corporate veil offers you vital personal liability protection from creditors, lawsuits, and other business disputes.

That said, the personal liability protection offered by these business entities is not absolute. Indeed, there are several circumstances in which a creditor can come after your personal assets to settle a claim against your business. When this happens, it’s known as “piercing the corporate veil.” 

And though the corporate veil can be pierced if you commit fraud or intentionally misuse the protective status offered by these entities, most of the time it happens due to innocent mistakes, such as inadvertently mixing your personal and business affairs.

To ensure your personal assets are safeguarded from liabilities incurred by your company, here are three key ways to help keep your corporate veil intact.

1. Observe corporate formalities

One of the most important ways to keep your veil intact is to strictly adhere to all formalities your corporate entity is required to follow. Whether this is filing an annual report, adopting corporate bylaws, or keeping detailed records (minutes) of meetings where major business decisions are made, it’s vital that you’re aware of and abide by these obligations.

Required corporate formalities vary by state, with some states requiring much more than others. If these formalities are not properly observed, a court can remove the corporate veil, leaving your personal assets vulnerable to business creditors. To help prevent this, we offer maintenance packages specifically tailored to our state’s laws, which make adhering to these requirements as simple as possible.

2. Keep your personal and business assets separate

To keep the corporate veil intact, you’re required to keep your personal and business finances totally separate at all times. If not, a court can claim your business entity is nothing but a shell and remove the corporate protection shielding your personal assets.

This means you should not only maintain separate bank accounts for your company and your personal finances, but you should never use corporate funds to pay for personal expenses, such as your mortgage or credit card bill. Even depositing a check made out to your business into your personal account could be considered a violation, so avoid commingling your own finances with those of your company at all costs. 

When you work with us, we perform regular reviews of your company financials to be certain everything is being kept totally separate and your personal assets are protected.

3. Consider wisely whether to cosign a business loan or use personal assets as collateral

If you’re like most entrepreneurs, you probably don’t have access to a lot of startup capital. Given this, you may decide to take out a business loan to get your operation off the ground.

However, if you cosign on a business loan or personally guarantee a financial obligation for your corporate entity, you share responsibility with the company for paying it back. And if you default on the loan, business creditors can come after your personal assets to settle the debt.

Similarly, when taking out a business loan, if you put up any personal assets like your home as collateral, the property you use can be seized and sold to pay off your business creditors.

Keep the veil intact

With all of the different rules and requirements surrounding corporations and LLCs, you should be diligent about ensuring you’re not opening yourself up to be personally liable for your business debts. All it takes is one mistake to pierce the protective veil.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

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