Problem: People just don't know what they don't know about Asset Protection.
Perhaps the biggest problem for startup businesses in recent years has been the significant increase in corporate veil piercing claims by creditors holding the investors and operators of an LLC personally liable for business liabilities. And in many cases it's because the ease of filing an Online form at the Colorado Secretary of State website gives people the illusion that they don't need to do anything else to protect themselves. Because the Secretary of States has made LLC formation so easy it causes serious problems because people think that they can form an LLC themselves without any assistance of an attorney.
I run into this all the time! “I've got my LLC. I filed it. I don't need to do anything else!” And many business owners, especially in real estate find out only when it's too late that this is just DEAD WRONG! And some businesses are started by investors who want to avoid the “expense” of attorney fees to have a knowledgeable business lawyer help them form the business
Rule: I've found that it's about 90-100 times as expensive to fix problems after they occur rather than getting it done right the first time.
So, step 1 is really talk to an experienced small business attorney who will walk you through all the steps needed to properly form and maintain your new business.
This guideline is about what you need to know about piercing the corporate veil and holding the Members liable and what to do to avoid some of these problems.
- Filing the Articles of Organization with the Secretary of State web-site is just step 1. And even this is not as simple as it appears.
- Get an EIN number from the IRS.
- Properly set up a business bank account.
- Make sure you're doing business in the name of the LLC by properly identifying the business entity in all business correspondence.
- If you are signing contracts, make sure you are properly signing the contracts in the name of the LLC and not yourself.
- Keep proper business records to properly identify corporate debts versus personal debts.
- Keep proper records to document investments to the business from personal assets or the member(s) directly.
- Most important: Have a professionally drafted Operating Agreement by an attorney who is familiar with your business and what you intend to do with it. Do NOT download an Operating Agreement that is easily found online but typically doesn't cover a host of problems. “Free LLC Operating Agreements” – are worth exactly what you paid for it! Nothing at all in most cases.
These problems are most prevalent in the context of the single member LLC because there the owners think “it's just me, why do I need all this paperwork?” Answer: Because if you don't have it done right and if you don't keep the proper records after business formation you make it much easier to sue you and hold you personally liable for business debts! That's why!