Many business owners and farmers use limited liability companies ("LLC") as their business form. Business owners often prefer LLCs to own their business assets because they are easier to set up and administer than a corporation and can provide more protection than a traditional partnership. Farmers sometimes use LLCs to separate their business interests by placing operating assets like livestock and machinery in an LLC. For both small businesses and farmers, LLCs offer succession planning opportunities and, importantly, liability protection. However, there is still some basic maintenance that must be done for the LLC to provide the best protection in the event the owner is sued.
One of the biggest benefits of an LLC is that it establishes a separate entity from the individual owner. This means that if the LLC is sued only the assets of the LLC are at risk. The owner's individual assets are protected. However, the LLC must be properly maintained to ensure a court does not treat it like an "alter ego" of the owner and thereby open the door to personal liability for the actions of the LLC.
If an owner of an LLC has been sued along with the LLC, the court will look at a number of factors to determine whether the owner should be personally liable for the LLC. Here is a non-exhaustive list of items the court might consider:
This list and the examples given are just a few factors a court would consider if the status of the LLC is being challenged. All of the facts and circumstances surrounding the company would be taken together to determine if the business owner is using the LLC as a mere "instrumentality" of the individual owner. By keeping a separate checking account, maintaining good corporate records, and holding the business out as an LLC the business owner will have a strong case for preserving the limited liability benefit of the limited liability company and reducing the risk of being personally liable.
Our attorneys can help you start your business off on the right foot.
We understand business law.
For more information or to schedule an appointment, call (507) 288-5567 or send us an email.