Is it enough to simply register a limited liability company (“LLC”) with the secretary of state and do nothing else? No. Many people form limited liability companies with the hope of avoiding any personal liability but often fail to take the necessary steps to prevent a court from piercing the corporate veil holding them responsible for culpable acts of their company. As LLCs have become the go-to entity type for many business owners, it is important to understand the basic principles to avoid losing the legal protection afforded to LLC owners also known as members.
In majority of states, with the exception of very few scenarios, it is commonly understood that members of LLCs are not individually held liable to third parties for acts of the company. States recognize an LLC as a separate and independent legal entity from its members, holding only the entity itself liable for its own acts. However, this isn’t always the case in instances where the member fails to follow corporate formalities. As we explore a few of the mistakes taken by LLC owners, you the reader should consider the day-to-day steps you’re taking in operating your company. What are some of the common reasons LLCs fail?
Comingling of Assets
A strong basis courts have used since the inception of LLCs, is to hold LLC members liable for acts of the entity and no longer protected by the legal veil afforded to an LLC where there is comingling of the members funds, property, assets and the company’s property. You cannot take a gift given to you from your grandmother and simply deposit it into the company’s bank account without properly recording it as a contribution from you to the company. Most definitely, you cannot use company’s bank accounts to pay for your personal expenses. In those instances, an argument can be made that there is no actual separation between you personally and the company. Just as you use company’s funds to pay for your personal expenses, a creditor should be allowed to enforce a judgment against your personal assets. Thereby, holding you personally liable.
Failure to Renew
When a company fails to renew it articles with the secretary of state, it not only jeopardizes your company from being able obtain loans, undergo certain business transactions, or bring a lawsuit against someone, but it also prevents an LLC debtor from claiming the existence of an actual LLC to prevent a creditor from coming after its members. A common misconception is that once I form my entity, I no longer have to worry about the secretary of state. Let’s debunk this myth. Most states require a yearly or bi-yearly renewal of the company by paying a franchise tax, or in some states filing an annual report. This is typically due by the annual anniversary from when the company was first formed. It is important to keep LLCs compliant. When a company fails to renew, it could go into delinquent status, and ultimately administratively dissolved.
In the event of a lawsuit, how one operates their LLC is critical to prevent holding them personally liable. Understanding where funds are going, how assets are being titled, and how they’re being used everyday matters significantly. The fate of your LLC rests in your ability to operate your company in a manner consistent with your state’s corporate governance statutes and practice.
For additional information about Asset Protection Planning, contact The Presser Law Firm, P.A. for a complimentary preliminary consultation. The Presser Law Firm P.A. 6830 N. Federal Highway, Boca Raton FL 33487 (561) 953-1050 or email info@assetprotectionattorneys.com.