If you own a small business, odds are that you formed it as a limited liability company, or LLC. You’re not alone, the majority of new businesses in the United States are formed as LLCs because they provide the shield against personal liability similar to a corporation, but LLCs offer far more flexibility then corporations. In addition, an LLC is easy to form and much less formal than a corporation.
Many new business owners form their LLC online or through a service company. Once they create their articles of organization and other documents filed in their file cabinet, they focus on running their new business with all the protection an LLC can provide.
Unfortunately, things are not that simple. An LLC provides liability protection, but members are not bullet proof or completely immune from liability. Under certain circumstances, the LLC can be pierced exposing the member to personal liability. So what can be done to protect the member and their LLC? This blog series examines some simple steps that will help strengthen and preserve your LLC.
- Develop an operating agreement. An operating agreement, like a partnership or shareholder agreement, will fully and accurately document the agreement between the members of the LLC. At a minimum, the LLC should have a simple and straightforward operating agreement documenting the rights, duties, and responsibilities for the members and managers.
- Capitalize the LLC. Make sure the LLC has enough capital to pay its foreseeable expenses and debt. A creditor will have an easier time seeking payment out of your personal assets if you incur debts on behalf of the LLC which it obviously would never be able to pay. Consider making a budget of anticipated expenses and use that budget to determine the amount of your initial cash contribution. Courts are more likely to look through the LLC to your personal assets if the LLC was undercapitalized from its inception.