Avoiding the Risks of a Single-Member LLC (Again) - All Up In Yo' Business
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For more on single-member LLCs, watch 'How Do I Pay Myself in a Single-Member LLC?' at http://youtu.be/fWkbJs3XLrs?list=UUNh...
Forming a limited liability company can be a great way for business owners to avoid personal liability for the debts and liabilities of the company. However, being the sole member in a single-member LLC carries with it an enhanced risk of personal liability by creditors piercing the corporate veil and the alter ego doctrine. If the assets and the actions of the LLC are so intertwined that the LLC is merely the "alter ego" of the business owner, creditors may be able to pierce the corporate veil and go after the personal assets of the business owner to satisfy debts of the company.
Some of the most important steps that need to be taken to attempt to avoid a creditor being able to pierce the corporate veil are:
1. Follow legal formalities: even in a single-member LLC, the LLC still needs to keep records and meeting minutes, and follow a well-drafted operating agreement;
2. Adequate capitalization: under-capitalizing an LLC is a sure-fire way to open yourself up to personal liability;
3. Never commingle funds: EVER! Business funds pay business expenses and your personal funds pay personal expenses. No "borrowing" from the company to pay your mortgage.
4. Always act on behalf of the LLC: when you sign documents on behalf of the LLC, make sure you are signing documents ON BEHALF OF THE LLC. For example, I would sign paperwork as "The Law Office of Aiden H. Kramer, LLC, By: Aiden Kramer, Member." I am not signing in my personal capacity.
These are just some of the most important steps that need to be taken to attempt to avoid personal liability in a single-member LLC.
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