The following is an informational guide concerning limited liability companies (“LLC”). This guide should not be interpreted as a comprehensive dissertation on the law of LLC’s, it sets forth some highlights of things you should always remember.
TREAT THE LLC AS A SEPARATE ENTITY
A LLC is only as good as you make it. What this means is that once you create an LLC, you should engage in a certain number of formalities, which will provide you the limited liability protection you are seeking. For example, you should:
- notify your suppliers that you are now engaged in business as an LLC and give your suppliers your new name, your new tax identification number, and your new title as an officer of the LLC;
- change all of your stationery, purchase order forms, contracts, and any other documents which contain your old trade name to reflect the new name;
- make sure that you sign all documents in the name of your new LLC, and as an officer of that LLC. Accordingly, whenever you sign your name, make sure that the name of the LLC is above the signature line; and make sure that below the line you indicate your title. This will extinguish the possibility that your opponent will argue that if you signed in your individual name, without setting forth at least your title, or the name of the LLC, then you were acting individually, making you individually responsible for the LLC’s obligation.
THE LLC NAME
By obtaining an LLC name, you are not guaranteed exclusive use of that name. Name registration only means that the State Corporation Bureau cannot provide that name to someone else. If your name is valuable to you, consider a state and/or federal trademark registration to gain the ultimate protection of the name and its goodwill. Please call me for further explanation of this relatively inexpensive process.
ADDITIONAL ASSET PROTECTION
You should also give thought to leasing to the company to be used by the LLC, which are owned by you. This can include tools, trucks, motor vehicles, office equipment or any tangible or intangibles such as copyrights, trademarks, etc. By maintaining ownership of those items in your own name and leasing them to the company, you not only receive additional income by way of the lease, but you also insulate that asset from creditors of the company. However, keep in mind that any new equipment you buy, which is paid for by the Company, must be titled in the name of the Company. If you are buying the equipment with your own funds, you still may title that equipment in your name, and lease it to the Company. The basic rule of thumb is anything that has potential liability such as automobiles, should be owned by the entity or individual who could best handle the responsibility of a lawsuit. We usually recommend that the Company maintain the liabilities and the individuals behind the Company maintain the assets. If a vehicle is owned by the Company and is involved in an accident, only the LLC’s assets are “on the line” to answer for that accident. Your individual assets are insulated. We maintain lease and license agreements which you can use to accomplish these responsible goals. Please call me if you would like to go over this in more detail.
CONSIDERATION OF TAX FREE EXCHANGES
If you are contemplating a merger of your business with another business in the not too distant future or, if you are interested in building up the LLC only to sell it later, you should favorably consider a corporation instead of an LLC so that you can provide for a tax free reorganization when and if there is a merger or sale. Unfortunately, under the law, a tax free reorganization is not available when one of the parties is an LLC.
INDIVIDUAL LIABILITY FOR TAXES
Even though an LLC will create limited liability for many obligations, it does not create an absolute limit on individual liability. The major area of liability that might be yours personally, is with trust fund taxes. For example, if the company withholds taxes from its employees, and fails to remit those taxes, then the Internal Revenue will hold you as an officer or director personally responsible. This is true for employees who have check signing power on the company’s accounts. Similarly, if in your business you collect sales taxes or are required to withhold trust fund taxes such as unemployment compensation or state income tax withholding, your failure to remit those taxes to the appropriate authority will result in personal liability. Accordingly, keep in mind that you should never finance your operations by failing to remit trust fund taxes.
In addition, certain municipalities have a legal right to pursue officers of LLC’s for their failure to pay business privilege taxes. Therefore, you should also ensure that these taxes are paid as and when due.
If any of the above is not clear, or if you have any questions on any other aspect of the LLC, please contact us so that we can discuss it.