Legal Challenges for Limited Liability Companies

Written by  //  April 29, 2013  //  Small Business  //  Comments Off

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The very nature of the name, limited liability company, suggests that owners of such businesses have less of a concern or perhaps worry about maintaining legal compliance. After all, an LLC is a simple structure, one that is designed to protect its owner(s) from lawsuits and such, right? Not exactly.

An LLC does offer certain protections, including helping people avoid personal lawsuits. However, the LLC itself can be sued and its assets tapped to settle a payout. There is no perfect business structure, something LLC owners should be aware of.

Business Liability

It is true that owners of LLCs do not usually face personal liability when running the business. If the business is sued, the assets of the company are in play, but the personal assets of the owner(s) are not. There are exceptions, however. If it can be proven that the owner was negligent or that he failed to follow incorporation procedures, then those assets may be in play. LLC owners can reduce the chances of being sued successfully by carefully separating their personal and business assets.

LLC Taxation

Tax rules for LLCs vary from state to state. On the federal level, LLCs do not have a separate tax classification. Still, its owners are required to file their returns as a corporation, a partnership or as a sole proprietor. Moreover, each state and some local jurisdictions require further tax compliance including the submission of an annual report with the related fee. Special taxes that may apply to an LLC might not apply to other business structures.

Corporate Formalities

Every business has certain guidelines that they must follow, what NOLO describes as corporate formalities. A lack of formality can harm such businesses, presenting an open door for a legal challenge. Formalities that must be followed include holding annual meetings of company directors and shareholders; keeping meeting minutes; and recording the adoption of company bylaws — what must be followed by the LLC’s members. If you are the lone owner of an LLC, these steps can be easy to miss.

Asset Mixing

If you commingle assets — combine your personal and business income and expenses — then you are exposing yourself to legal scrutiny. First, maintain separate checking accounts for personal and business. Second, deposit and spend funds appropriate to the account. For example, when a car payment is due, make payment through your personal account unless the car is an extension (registered) with your business. Maintain strict separation between business and personal accounts, and never promise a creditor that you will personally guarantee payment of your company’s debt.

Getting Help

If you believe that your LLC is legally exposed, then reach out to a business attorney immediately. This professional can help you follow the required guidelines, ensuring that your business meets all federal, state and local regulations moving forward. You can also work with a tax accountant, a professional that will guide you on maintaining separate financial records for your business.

References

NOLO: Piercing the Corporate Veil: When LLCs and Corporations May be at Risk

Entrepreneur: LLC Basics

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