Is your LLC protecting you?
Many, if not most, of today's contractors organize their businesses as corporations or as an increasingly popular Limited Liability Company (LLC). Created pursuant to N.C.G.S. § 57D, The LLC is a versatile business tool that allows a business owner to shield personal assets from business liability in a simpler and often tax advantageous way than by organizing as a traditional corporation. Reduced formalities, simpler reporting requirements, ease in changing ownership, and pass through taxation are all advantages of organizing as an LLC, however, if you are not operating the LLC properly, your protections could be at risk.
One of the first things we evaluate when representing an LLC, or when investigating a potential claim against the LLC, is whether the LLC properly protects the owner(s) or whether a claimant can "pierce the corporate veil" to get to the owner personally. Several factors, such as failure to follow meeting and reporting procedures, comingling of personal and LLC funds, or the LLC providing unpaid services to its owners may allow a sharp attorney to convince the court that the LLC is merely an "alter ego" of its owners and therefore should not shield the owners from personal liability for LLC obligations. More than a few owners have been surprised when found liable for the debts of their LLC. Personal guarantees of the credit accounts of the LLC is a trap many owners encounter when a situation turns bad and they find themselves on the hook for LLC liability.
A sound LLC shield starts with proper documents, including an operating agreement that is followed by the management of the company. Properly held and documented annual membership meetings and clear delineation of personal and LLC funds and activities are crucial in defending against personal liability. The LLC is a very helpful vehicle for many businesses, but like any tool, it must be properly used to be effective.
If a review of your current LLC or corporate structure is in order, or if you are considering incorporation or LLC formation for your business, don't hesitate to contact us for a review consultation. A little prevention now can prevent a lot of potential headache in the future. Do it right the first time.