When operating your small business as a Limited Liability Company, it is very important that you conduct business as the LLC legally. Proper procedures and practices will preserve your liability protection and make it difficult for savvy attorneys to bypass your LLC and sue you individually. Below is a guideline for you to follow to keep good practices as you do business as your LLC.
Personal liability through co-mingling:
The greatest threat to your LLC is you. If you comingle your personal business with that of your company you are opening the door to challenges that your LLC is not actually a real entity. To prevent an argument for comingling follow these rules:
1. Never pay LLC debtor or bills with personal money.
2. Never pay Personal bills with LLC money.
3. Never deposit LLC money into a personal account.
4. Never deposit personal money into LLC accounts.
5. Open a LLC account in the name of the LLC.
6. Pay yourself a salary or draw based upon a documented business plan and do so in an ordinary fashion. Consult with a bookkeeper for guidance about how to pay yourself legally.
7. Keep LLC expenses strictly business expenses. For example: don’t pay your personal cell phone with the business account unless you document that you are using it for business purposes. Same with all other bills.
8. Do not open LLC accounts in your personal name. This includes power, water, trash, phones, internet, banking, insurance, or any other business account.
Personal liability through sloppiness or laziness of signature practices:
In addition to comingling you can bind yourself personally to the liabilities of the LLC by not maintaining signature discipline. Always be mindful of who is acting when you sign a document. You are not your LLC. If the LLC is the principal acting that created the paper your signature should read as follows:
Cool Business, LLC by Johnny Coolname, its member.
Cool Business, LLC by Johnny Coolname, its manager. (for manager managed LLCs)
If the document you are signing has this already typed in the signature block you can generally just sign the document. However, if the signature block just has your name typed or has nothing typed at all, you need to write the above into the block.
Personal Liability through inattention to detail:
Similar to the signature liability, you can arguably bind yourself individually to a document just by not paying attention to the documents details. Some documents, such as invoices, bear the name of the buyer or client at the top of the page. You should ensure that the LLCs name is the party on the invoice. Documents can also contain clauses creating personal liability for signatories regardless of the entity signing. You shouldn’t agree to documents that bear this type of personal liability unless absolutely necessary. Most banks will require you to sign a personal guaranty for corporate debt, and a refusal will be met with a denial of the loan. It doesn’t hurt to ask though.
Liability protection through tax identity:
If I have not done so for you, you may want to apply for an Employee Identification Number (EIN) for your LLC. You need to talk to your accountant or bookkeeper thought as this has tax ramifications as well. By operating on paper and through the government as an entity with a separate taxable identity from your own personal social security number you are lending your LLC a greater amount of presumptive validity in the face of challenges by creditor or the government. You apply for and receive this number online through the IRS webpage at irs.gov.
Liability protection through LLC structure and formality:
One of the benefits of choosing an LLC form of business entity is less formal structure and paperwork to maintain. However, less does not mean none. You should at a minimum have a record book of some kind were you record significant LLC decisions through membership resolutions. For example if you lease your company a building you need to actually have a written lease signed by you as member like I said above, and as yourself personally.
Liability protection through filing with the state:
One of the most common problems I see with LLC owners is a failure to file annual reports. This is a very easy way of ruining your liability protection. Every year the State of Illinois sends the registered agent of the LLC as annual report to return along with a payment to maintain the active status of the LLC. Fill it out and send in the money. If you don’t file this report, your LLC will be inactive and eventually dissolved involuntarily. This can have far reaching effects to you individually should it happen.
Conclusion and Caveat:
This is a very basic guide for LLC’s in Illinois. This guide is not meant to be legal advice for your particular business. All businesses are different. Additionally there are tax consequences and factors in play regarding your choice of business organizational structure and operations procedures. Any decision you made should also be discussed with your tax expert prior to implementation. Should you need to discuss your individual business and its organizational structure I encourage you to contact Barash & Everett, LLC.