Protecting the Limited Liability Status of Your LLC

One of the main reasons why businesses form as an Limited Liability Company (LLC) is the Limited Liability Protection offered to the members (owners) of the LLC. This basically means the members of the LLC, providing they do not engage in any criminal or fraudulent practice, are shielded from Lawsuits the LLC is faced with. This Limited Liability Protection is also known the Corporate Veil.

Just forming your business as an LLC however is not alone sufficient to ensure the Limited Liability Protection for your Business. The Corporate Veil can be “Pierced” (broken) and the members of the LLC can be personally responsible for the liabilities of the LLC. This generally happens if the LLC does not operate the way an LLC should. Single member (owner) LLC’s are usually at greater risk of having their Corporate Veil Pierced.

The following steps outline some of the most common ways to ensure your LLC is operating as it should:

1. Separation of Personal and Business finances and assets.

If you use your personal bank account to transact business for your LLC, you are basically saying there is no separation between you and your business. Single member LLC’s which do this may be viewed as a Sole Proprietorship rather than an LLC, and the owner may be personally liable for all the debts and lawsuits the business faces.

How to stay compliant

Having a separate business bank account as well as a dedicated business credit card for the LLC will help avoid this.

2. File Federal and State Tax Returns for the LLC

Maintaining proper accounting for the LLC and filing State and Federal tax returns for your LLC

will help maintain the status of your LLC as an independent entity, separate from its owners. While LLC’s have pass through taxation of profits on both a Federal and State level, LLC’s are still required to file annual tax returns for both Federal and State level while not actually paying any tax. Though some States do tax LLC’s in the form business franchise tax.

How to stay compliant

Use accounting tools, such as those provided by XERO or hire an accountant to stay up to date with finances of your LLC to make filing your tax returns easier. Also learn more about specific state tax requirements.

3. Stay compliant with Annual Reports and other State filing requirements

Maintaining full compliance with state regulations and filing requirements. In some states not filing annual reports with the state etc can result in automatic dissolution of your LLC. If your LLC is dissolved by the state then the owners of the business no longer have the limited liability protection.

How to stay compliant

Find out what your state filing requirements are. Using a registered agent service can help you keep up to date with all your filing requirements, incfile provides a reliable registered agent service

4. Have an Operating Agreement for your LLC

An operating agreement is legal document outlining the ownership and operating procedures of your Limited Liability Company. In some states having an operating agreement is a mandatory requirement - Find out if an Operating Agreement is required in your State. Having an operating agreement is a useful way of showing that the LLC is a formal entity in its own right. For single member LLCs it will help provide more legitimacy to the LLC. For multi member LLCs it will set clear expectations about partner roles and responsibilities, preventing unnecessary legal disputes.

How to stay compliant

You can have a lawyer draft up an operating agreement for your LLC, or use paid services such as Rocketlawyer. You may find our free operating agreement template in our legal forms tool helpful.