Business Formation – Protecting Limited Liability

This post on protecting limited liability is a continuation of last week’s post on business entities, I want to discuss an important topic about protecting the limited liability you need to protect your other businesses and personal assets from liability in the event of litigation or some other event.

The most important element in an LLC or Corporation is protecting limited liability for the owner(s). If you are going to set up this type of entity over a sole proprietorship or partnership, ensure you protect that limited liability. By protecting the liability, I mean that if your business falls into a lawsuit or goes under, you need to make sure that the liability will not fall back on your shoulders as the owner. Here are a few (not all) of the steps you should take toward this end.

Entity - Make sure you get your business set up under the right entity with the right documents. This is the first and most important step which is why I advise above to get the right counsel in doing so.

Funding your Business - When you fund your business, make sure you make capital investments enough to get your business off the ground for a few months. Too many small investments can give the view that the business is not a separate entity.

Separate Bank Accounts - Ensure you have separate business and personal bank accounts and keep them separate. This means only business expenses out of the business account and only personal expenses out of the personal account.

Loans - Any loans to owners should be documented as of they were made to an outside individual or company.

Company Name - The company name should always include “LLC” or the appropriate equivalent on all business documents and dealings.

Company Debts - Don’t hold yourself personally liable for company debts. This is a common practice for banks to require that an individual sign for company debts, but if possible you should avoid doing so.

Record-Keeping - Maintain all adequate documentation for the business in a timely manner. Keep Secretary of State filings up-to-date, keep annual meeting minutes, keep financials and supporting documents, and document all capital investments and distributions/dividends through writing checks or interbank transfers to leave a paper trail.

Dividends and Distributions - Some business entities will require that an owner take a “reasonable salary.” If this is the case for your entity, ensure that you take such a salary and that distributions are made on a quarterly basis based on how successful the business is. If you are not required to take a salary, take monthly distributions to avoid commingling accounts.

Multiple Businesses - If you own multiple businesses, you need to be diligent in keeping these two entities separate. The risk here is that liability could spread to your other businesses if there is no clear distinction. Keep separate QB files, records, and employees. Also, if possible, arrange so that someone else owns and controls a majority interest in the other entity.

Don’t Commit Fraud or Illegal Acts! - Don’t attempt to use your business as a way to get out of personal liabilities or to shield wrongdoing. This is the fastest way to the courtroom and the simplest way to unravel everything else you are doing in your business.

Keep Liabilities Current - Don’t get behind on payroll taxes or mortgage payments. If you don’t give anyone a reason to challenge your business entity’s limited liability, then it is less likely that when something bad does happen that you will be found liable.

Business Insurance - Insure your business as necessary to offset risks for your industry.

Any more thoughts? Let me know in the comments section or send me an email and I will look into adding it here. I hope this information is helpful to you in protecting limited liability for you and ensuring your business’ continuing success!

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