Playing by the Rules When Forming an LLC

Why Form an LLC?

If you own a business, particularly a high liability business, forming an LLC is a great option to afford yourself protection from personal liability in the event of a lawsuit, but simply forming an LLC will not protect you from personal liability. You must play by the rules. So, what are the rules?

The Rules

In order to prevent a plaintiff from holding you personally liable for damages in a lawsuit involving your LLC or to prevent a plaintiff from attaching assets in your personal name, you must play by the following rules:

1. You MUST draft an operating agreement. An operating agreement sets forth the manner in which your business operates, i.e., Who are the managing members? How often do you meet? Where are the minutes located?;

2. You MUST follow the rules. Just drafting an operating agreement means nothing unless you follow the operations set up in the agreement. For example you must actually take minutes when you meet and keep them accessible and meet at least the minimum number of times set forth in the operating agreement;

3. You MUST keep your LLC assets and liabilities separate from your personal assets. This simply means setting up a separate account in the LLC’s name where all of your income and expenses of the LLC flow through;

4. Finally, you MUST properly title all of the LLC’s assets in the name of the LLC.

The Consequences

If you fail to follow the rules set forth above there will be consequences if your LLC gets sued. The consequence that undermines the whole point of setting up an LLC is that the corporate veil is pierced and you are held personally liable for damages.

If you own a business and want to discuss an LLC further, call my office today for a free consult. Drafting an operating agreement for your LLC is relatively inexpensive, not having one could be the most expensive mistake of your life.

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