Protecting a Single Member LLC from Lawsuits

Did you know that the wrong behavior can cost you everything if you are a single member LLC? If you aren’t careful in the way you conduct your …

Business

Did you know that the wrong behavior can cost you everything if you are a single member LLC? If you aren’t careful in the way you conduct your business, the wrong behavior could exopose you to personal loss, despite thinking your company structure protects you. A lawsuit from a creditor or other aggrieved party could cause a court to pierce the veil of your LLC, which would effectively make your personal assets a target for a legal settlement.

Courts will typically pierce the veil of limited liability protection with smaller, private companies such as close corporations and the single-member LLC, and this is because the smaller companies are often family or individual owned, with owner-operators who don’t feel any need to follow the good behavior shown below.

Real estate investments, for example, are often held in a single-member LLC, and courts have found that when the owner becomes too involved in the daily management of them, they lose the claim that the business entity owns them. Such owners might be advised to use a property manager and a tenant screening service, and other such contractors to stay personally removed from the operation. It’s the difference between risky behavior and good behavior.

The good news is that the following tips can help you to recognize, correct, and avoid bad behavior altogether.

Bad Behavior 101

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There are several actions that you need to avoid as a single member LLC. These bad behaviors include:

  • Leaving business debts unpaid.
  • Placing an “unjust cost” on a third party.
  • Misrepresenting your business to a lender, so that you can receive the optimal business loan.
  • Forming the LLC without the money needed to actually operate the business.
  • Commingling personal and business funds.
  • Cashing company checks directly into your personal account, rather than placing it in the LLC account where it belongs.
  • Using LLC funds to pay personal bills.
  • Failing to keep the appropriate separation between business and personal responsibilities.

If you are conducting your business with any of the above behavior, then you could be laying the ground for a court to pierce the veil of your protection.

Fortunately, you can begin to protect your single-member LLC by actively completing the following acts of good behavior.

Good Behavior Tips for a Single Member LLC

As a single-member LLC, it is imperative that you avoid any potentially fraudulent activities. The first step is to create your LLC to your advantage, and then to stay on top of the periodic filings required. See this example of forming an LLC in California for tips on what to think about. To ensure that your LLC remains in good standing, and that it can offer the maximum protection to your personal assets, you should keep the following good behavior tips in mind.

  • File all of the necessary paperwork with the state.
  • Maintain a Certificate of Good Standing at all times.
  • Follow the Operating Agreement “to a T”. This highly customizable document should be written for use within your specific LLC, which is why you need to carefully follow it (even if you are the only member). For example, as a single member LLC, you might specify within your operating agreement that no meetings are held, making a formal account of why no meeting minutes exist.
  • And if you decide not to hold meetings, then you should at a bare minimum keep an accurate and clear record of resolutions and important decisions.
  • Never write personal checks or pay personal bills with money from your LLC.
  • Your logo and letterhead should be taken seriously so that you can once again maintain a clear separation between your professional and personal lives.
  • Don’t make a personal guarantee on any type of business loan. With this in mind, you want to avoid “handshake agreements” in favor of legal written agreements.
  • When in doubt, ensure that you have kept an accurate paper trail of conduct.

Following the above tips can help you to ensure that your single member LLC remains protected and strong year after year. As a short recap, your good behavior will include making a paper trail for every significant business action that has taken place. Always act as if someone is watching, because one day a court may recreate your steps.

The Bottom Line: Maintain a Paper Trail of Conduct and Mind the Money

In conclusion, if you want to avoid the financial downside and negative impacts that can occur when a court is being asked to pierce the veil, then you need to ensure that you always follow the good behavior outlined here. By avoiding the bad behavior, you can ensure that your LLC offers the optimal level of personal liability protection to your carefully acquired assets. Finally, remember that the lessons you learn as a single member LLC can readily be applied if your LLC gains new members.

Nothing here should be construed as legal or accounting advice and the golden rules remains that for all your questions about how to run your business you should never hesitate to seek professional accounting and legal advice. With the right team at your side you can gain the insights that you need to maintain a paper trail of conduct, mind the money, and otherwise avoid making a crucial error via bad behaviors. When conducted with good behavior, your LLC can offer extensive personal liability protection.

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