LLC Owners Make Big Mistake

By Robert Montgomery | July 31, 2007

You can avoid a serious mistake which I see many 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 enough assets in the business to pay off a legal judgment so they go after the individuals and their personal assets also.

However, Yan LLC owner can protect their personal assets from a judgment if they you can prove that their LLC has been organized and operated as a separate legal entity under the law. This is called limited liability protection. It’s the lwell established legal principle that protects your personal assets from judgments against your business.

Limited liability protection can provide a layer of protection between your business and your home, vehicles, retirement benefits, savings, recreational vehicles and other personal assets. 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 fairly easy 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. By answering the questions below, you can tell if you have completed the process of organizing your LLC. If you answer no to any of the questions, then you haven’t fully completed the process:

Have you filed the initial Articles of Organization with the State Filing Office?

Have all members or owners of the LLC 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 that is separate from your individual bank account?

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. This 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.”

Avoid making a serious mistake when setting up your own LLC. Read about the “Seven Essential Steps to Setting Up Your Own LLC” by Attorney Robert Montgomery. form LLC and liability protection

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