Limited liability is the cornerstone of modern, corporate free enterprise. It means the entrepreneur puts no more of their personal fortune at risk than they invest in the company they create. Their personal assets not invested in the venture may not be reached by the company’s creditors should the business fail.
Limited Liability Companies (LLCs) are a fairly recent invention in the history of corporatism. Today, they have become the business organization of choice for most small businesses. And – let us start here – the protection they afford their owners is identical to that afforded by business corporations (“Inc.”).
That protection, that screen between a company and its owner or owners, is somewhat poetically called the Corporate Veil. (The term first started appearing in Florida Law in the 1930s, in the throes of the Great Depression.) The bad news is, the veil can be pierced.
There are precautions one can take to avoid this, however, the first of which being to consult an attorney. This blog only lays out a few basic principles.
It will quickly become evident to the entrepreneur that the keys to a strong corporate veil are money and paperwork.
First, fully capitalize the business. Let’s say your business plan shows you won’t make a profit the first year, which is to be expected of a brand new business. But you only put enough money in the business to pay rent and salaries for a month. You can always put more in later after all. That would be a crucial mistake. The business would be under-capitalized, which goes a long way toward a court piercing its corporate veil. That is because, in a scenario like this, there is little difference between you and the company. You are the one, albeit indirectly, paying rent and wages.
Second, do not commingle your money and the company’s. The company pays the salaries. It pays for business expenses, down to the last paper clip. You pay for everything personal. If you go to the post office and need stamps for home and for the business, run two transactions, one on the business card, and one on your personal card. Do not mix the two. Doing so makes the company look like the owners’ alter ego, and that frays the corporate veil.
All paperwork must be in order. If you are organizing an LLC with multiple owners, you should have an Operating Agreement, even for a husband-and-wife team or family LLC. If there is no document showing how the owners agree to run the company, is the latter really anything more than a group of people doing something or other together? Does it deserve a corporate veil?
Again, work with a lawyer. Things like officer compensation and distributions are best reduced to Members’ (i.e. Owners’) Resolutions. Your yearly annual report is best accompanied by an Annual-Meeting Resolution. You may own a small business, but even the smallest mom-and-pop operation must be treated like a big one, with its books in good order.
That also means keeping proper records. The company must have its own financials and tax returns of course. But there are additional records that Florida law demands be kept. A non-exhaustive list includes the name and contact information of every owner, the articles of organization, past income tax returns, a record of the value of company-owned property, etc. etc. A two-member LLC may not need a formal record of the owners to know who owns the business. But without it, your corporate veil starts fraying; without it, you are less of a “real” company whose assets are fully separated from its owners’.
A successful business can be your livelihood and much more beside. It can be a legacy, a source of pride, a contribution to the economy and your community. And it will be just as strong with “LLC” at the end of its name – so long as you and your lawyer take good care of it.