Tips for the unwary: How to maintain Limited Liability Company protection
Drew A. Anderson, Partner and Managing Director, Murray Plumb & Murray
You’ve taken the important step of establishing a Limited Liability Company (LLC) for your business or real estate venture. One of the major advantages of operating a business or owning real estate as an LLC is that you, as manager and/or member, are generally not personally liable for any business debts or obligations. However, you must observe certain formalities in order to maintain this LLC protection.
There are some basic rules that will help you avoid personal liability as a manager and/or member of an LLC.
Execution of Instruments
Do not sign any LLC documents or agreements in your individual capacity. Whenever your LLC enters into an agreement, contract, lease, or otherwise signs its name, sign using the following format:
Avoid comingling of personal and business assets
Maintain a separate bank account for all LLC funds – and run all LLC funds and distributions through this account. Do not pay personal expenses from the LLC account. As a manager or member, you may receive reasonable distributions, reimbursement for legitimate business expenses, and repayment of loans from the LLC.
All distributions to members or managers must be:
- reasonable salary and bonus
- reimbursement for legitimate business expenses
- repayment of loans, or
Unless the LLC is a sole member LLC (and perhaps even then), you must obtain a federal taxpayer identification number for the LLC. This number will be used for LLC bank accounts and tax returns. If you have employees, you also need a separate State of Maine employer identification number.
It may seem a needless exercise for you as a member or manager to vote to authorize yourself to take certain actions. However, it is this kind of formality the courts look for in determining whether to respect the independence of the LLC. Evidence of such votes, whether reflected in minutes you prepare or in a “unanimous written consent,” should be filed in the LLC record book. Therefore, it is good practice to have a meeting or a “unanimous written consent” document signed by all managers or members as appropriate and filed in the record book for significant transactions such as: execution of leases, major equipment purchases, borrowing of funds, major changes in business operations, sale of property, etc. A rule of thumb: If it’s something you would talk with a significant other or partner about if it was a personal matter, then put the LLC authorization in writing and include it in the LLC record book.
The LLC must file an annual report with the Maine Secretary of State. Otherwise, the company’s authority to conduct business in the State of Maine will be suspended. Suspension involves potential penalties and risks you’ll want to avoid.
Put all business documents, such as licenses, permits, registrations, leases, contracts, etc., in the name of the LLC (and executed as set forth above). If there are any such existing documents when the LLC is created, transfer them to the LLC. In some cases, you must give notice and get approval for such a transfer (from a lender or landlord, for example).
Just remember, if it looks and acts like an LLC, then it will be an LLC! And, you will be better protected.