The LLC structure is attractive to entrepreneurs for many reasons, not the least of which is due to its unique hybrid status (more on that below). Many business owners start off their companies as sole proprietorships and convert them to LLCs after some expansion. Although the process for setting up an LLC is fairly straightforward, there’s more work for you to do in order to enjoy its advantages. This blog will cover a few important ways to operate your LLC so you don’t lose the limited liability status.
Setting Up Your LLC
Creating an LLC is more work up front relative to a sole proprietorship, but it is not as intensive as setting up a C corporation. You’ll need to select a state in which to incorporate and name for your company. You will also need to select a registered agent to receive legal documents on your behalf. After filing your articles of organization with the state and drafting an operating agreement, you need to get an EIN for tax purposes.
The LLC structure is popular among entrepreneurs because of its hybrid structure; in other words, it combines attractive features of sole proprietorships (like pass-through taxation) and corporations (limited personal financial liability). However, it’s at this point that many LLC members (owners) make the mistake of thinking that simply setting up the company as an LLC is enough to enjoy the limited liability. In addition to creating the LLC, you must take certain actions to keep the limited liability.
Commingling Personal and Business Assets
A common mistake LLC members make is commingling the LLC’s assets with their personal assets. How might this happen? You, as an LLC member, might forget your personal debit card at home and purchase groceries with the company credit card. Or, in a bind, you withdraw money from your personal checking account to cover a few bills at work.
Doing this too much, or without documentation, can be ruinous for your personal bank accounts if a judgment is ever entered against your LLC. If courts see that you have commingled your personal and business assets, they will likely not regard your LLC as a separate entity. As a result, the plaintiff may be permitted to pierce the corporate veil.
Operating Multiple Business Ventures Under One LLC
More than ever, entrepreneurs are able to operate side hustles in addition to their bread and butter. From selling products on Amazon and Shopify to investing in real estate, there are many enterprises that can be placed under the umbrella of an LLC. Some entrepreneurs believe that operating all their business ventures under one LLC is efficient. This is not always the best idea.
If one business line is sued and loses, other companies under the same LLC could be vulnerable when it comes to satisfying the judgment. We encourage you to set up a separate LLC for each business venture. That way, your businesses are insulated from each other.
Putting Your Name on Business Contracts
The devil is in the details, and many entrepreneurs neglect to put their business on various third-party contracts and agreements. Again, this might seem like a minor point, but putting your name on a contract instead of your business can create problems. For instance, do you want your business to own its intellectual property or do you want you, an individual, to be the owner?
Let Us Help Set Up and Optimize Your Company
Using the LLC legal structure can be an effective way for your business to grow in a responsible way. Simply creating an LLC is not enough to enjoy the limited liability offered by the structure. In simple terms, you must treat your LLC like an LLC or potentially lose the limited liability you originally intended.
Setting up your business as an LLC may not even be the right decision for you in the first place. Lockhart IP can help you figure out what your goals are and what you need to do to get there. We’re looking forward to meeting with you and discussing your long-term business objectives.