In just 5 minutes, I can explain how you can avoid a serious mistake I see many LLC owners make. They try to form a limited liability company (LLC) by filing the initial form with the State Filing Office, usually the Secretary of State.
However, they stop at this point and do not go on and complete the whole process. This puts them at risk for losing the protection for their personal assets they were trying to get by filing the LLC in the first place.
How do I know this? Because I'm one of the people they often call to fix the problem.
Setting up an LLC is a process with several important steps. It's not hard, but each step is essential. I'll tell you what these steps are in a minute, but first I wanted to explain how the liability protection of an LLC works.
When a lawyer sues an LLC, they often sue the individual owners also. They do this because they know that most small businesses operated as an LLC do not have sufficient assets in the business to satisfy or pay off a legal judgment so they go after the individuals and their personal assets also.
However, you can protect your personal assets from a judgment if you can prove that you organized and operated your LLC as a separate legal entity under the law. This is called limited liability protection. It's the long established law that protects your personal assets from judgments against your business.
Limited liability protection can shield your home, vehicles, retirement benefits, savings, recreational vehicles and other personal assets from judgments against your business. This protection is one of the main reasons why business lawyers, like myself, strongly urge people to operate their business in the form of an LLC or corporation. However, this protection is not automatic. It requires the LLC to be set up and operated properly. If not, you leave yourself wide open to personal liability.
The fact that we live in a lawsuit crazy society where many people are willing to sue at the drop of a hat is no secret. Unfortunately, small business owners make an easy target. A lawsuit can come from disgruntled former employee, an unhappy customer, an injured person or a business competitor. Regardless of the source, the results can be financially devastating to you. And please don't make the mistake of thinking it can't happen to you. Believe me, it can. I've seen it.
The good news is that it's not that difficult to complete the process of forming an LLC. By doing so, your ability to protect your personal assets in the event of a lawsuit is much stronger. To see if you have completed the process of organizing an LLC, just answer the 6 questions below. If you answer no to any of the questions, then you haven't fully completed the process:
Have you filed Articles of Organization with the State Office or Secretary of State?
Have the members or owners of the LLC adopted or signed an Operating Agreement?
Have you conducted some form of an organizational meeting and prepared written minutes or other documentation?
Have you prepared written documentation showing the percentage ownership (or sharing ratio between members of the LLC)?
Have you obtained a new Employer ID No. (EIN) for the LLC from the IRS?
Have you set up a new bank account for the LLC as a separate legal entity?
Each step of the process is important to help prove that you have fully organized and are operating your business as a separate legal entity. Operating your LLC as a separate legal entity is what entitles you to the limited liability protection of the LLC structure or form.
You can read more about these steps in the Special Report "Seven Essential Steps in Setting Up Your Own LLC."
