Is your LLC properly maintained? Reducing Risk of Personal Liability

Limited Liability Companies

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.

Personal Liability

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.

Factors a Court will Consider

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:

  • Has the company observed formalities? The owner should make sure to follow its bylaws and make a record of company changes like ownership percentages, officers, or place of business. The owner should also be sure to sign as a member or officer of the LLC whenever signing contracts on behalf of the company. The LLC should also take the time to put written contracts in place if the LLC is part of the owner's larger enterprise. For example, a farmer's operating LLC might use another LLC for trucking purposes. It helps to demonstrate that the LLCs are separate and distinct entities if the owner can show that there is a written and enforced trucking agreement in place between the companies.
  • Does the company keep good records? When the LLC was initially formed it filed Articles of Organization with the Minnesota Secretary of State. If the member worked with an attorney in forming the new company, the LLC also likely has bylaws and a record of the first meeting in which officers are established and the LLC is funded. Keeping these records in a safe place and up-to-date is important for demonstrating that the business is being treated with formality. In addition to these initial record-keeping requirements, LLCs in Minnesota must also file an annual renewal each year to maintain good standing with the Secretary of State's Office.
  • Does the LLC have its own checking account? If not, it will be difficult to show that the owner is not intermingling funds. The business should have its own checking account to demonstrate that there is a business need and purpose. The business owner should not be using the business checking account for personal expenses, but instead should take the extra step of paying these funds out to the owner first.

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.

Forming an LLC

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Categories: Business