Sole-Owner LLCs: Are you really protected?
April 24, 2014
Many limited liability companies (“LLCs”) are created in an effort to decrease personal liability. However, if you are a sole owner of an LLC, it is important to do more than just create the LLC. There are many actions that must be taken after filing the organizational document, be it a Certificate of Formation or Articles of Organization, in order to ensure you are protected.
When a creditor takes action against the LLC, you can bet that an investigation will be undertaken to determine whether you have maintained a degree of separation between you and your business. In short, does your business act like an entity? If not, there is a significant risk that you may be held personally liable for the actions of the LLC.
Below are a few tips for making sure you are maintaining the necessary separation between your LLC and yourself:
- Operating agreement. Even if you are the sole member of the LLC, you should have a written operating agreement which outlines the organization of your company, even though you fill all the responsible positions in the company.
- Separate bank account. Your LLC must have its own bank account. You should never commingle personal funds with your LLC’s funds. If it is necessary, you can deposit personal funds into your LLC’s bank account, but those funds should be shown as a capital contribution or loan on the LLC’s books.
- Use your title. If you are signing an agreement or other document on behalf of the LLC, always include your title with your signature. For example, if you sign a contract, your signature should read “ABC, LLC, by: John Doe, Manager (or other title).” If you sign with only your name, you may be held to be personally responsible for what you signed.
- Document withdrawals. If you take money or assets from the LLC, you must document its purpose. You may record the withdrawal as a loan, compensation or other form of distribution.
- Use registered name. Unless you have registered a fictitious or assumed name, always use the full name of the entity as it appears in your organizational document. For example, do not use “ABC” instead of “ABC, LLC.” Also, any marketing efforts should refer to the company, not you personally. In other words, say “ABC provides reliable services,” not “I provide reliable services.”
While this list is not exhaustive, it is indicative of the need for the sole owner of an LLC to exhibit care in operating the LLC as a legally separate entity, and thereby limit to the potential for personal liability exposure.
If you have any questions about creating a limited liability company or would like to discuss your personal liability, please contact me, or the Scarinci Hollenbeck attorney with whom you work.