Forming an LLC does not mean you have automatically protected yourself from any and all future personal liability. Suffice it to say, Judges have seen it all when it comes to defendants in suits throwing up their LLC as a shield and there are now several ways around them. In legal terms, this is called, Piercing the Corporate Veil, and is used to garnish the personal assets of LLC owners who do not treat the business as a real business and fail to adequately separate their personal and business interests.
- Proper Capitalization of the LLC
Put simply, your business needs to have funds on hand to conduct ordinary business in your field. A construction company that builds residential homes in the San Antonio area must have money in their corporate accounts that matches the business they conduct on a regular basis. For instance, “Nate’s Texas Best Construction, LLC” that regularly builds homes for between $400k-$600k, and employs 5 full time employees in addition to a number of independent contractors, cannot have only $5,000 in their bank accounts when they are sued for a construction defect. A homeowner whose home value has been reduced by half and is seeking damages from the construction company LLC will likely be able to hold the LLC owners responsible in this situation.
- Observing Corporate Formalities
Treat the business as a business, plain and simple. If you are going to write personal checks for things, deposit LLC funds directly to your personal accounts, and never follow your operating agreement, there is argument that you shouldn’t bother with forming an LLC in the first place. When you form your Texas LLC, you MUST be ready to treat your small business as a separate and distinct entity, not some passing thought that only comes up every now and again. If your operating agreement states that certain meetings must happen in certain ways by certain times every year, you need to be sure you are performing those tasks. If your business makes certain decisions, you need to immortalize those decisions in the form of Corporate Resolutions.
- Avoiding Commingling of Assets
Do not deposit checks made out to the LLC into your personal account. Do not use LLC checks to pay your personal bills, debts, or mortgages. Keeping all of your company and personal assets entirely separate is a great way to show that you are actually treating your small business as a business and not some vehicle by which you are committing fraud on clients and customers. This can sometimes feel a little silly—Depositing a check into your LLC account, then writing a check to yourself from the LLC account, and then writing another check to pay a certain bill or debt. But it is actually vitally important to observe these formalities when dealing with your business.
If you have questions or concerns about personal liability from the business of your LLC or small business, San Antonio Business Attorney Nathaniel Gilbert can help guide you in the right direction for all of your business needs. If you’d like to fill out a form to contact Nate directly, Click Here. If you’d like to learn more about LLC Formation and Management in Texas, Click Here.