When you form a limited liability company, you are protected from personal liability if, say, someone sues your business. But how far does that protection extend to you? Are there instances in which your LLC will not protect you from personal liability? R&H Litigation Attorney Kris Wathne addresses these questions in this short article.
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If I Sign a Contract Will My LLC Protect Me Personally?
A few issues must be considered to answer this question. First, you must have a properly formed LLC. That is a fairly easy process. It requires that you fill out a few forms on the Colorado Secretary of State website. Second, you need to keep your LLC current. That means you have to periodically file reports and pay the fees associated with holding an LLC. If these steps are taken, generally, your LLC will provide personal liability coverage when you are working for your LLC.
What is My LLC’s Purpose?
The purpose of your LLC can be fairly broad. For instance, if you sell shoes, then when you are operating your shoe business, your LLC will protect you. However, in order for that protection to extend to you, you must be sure that the documents and contracts you’re signing on behalf of the LLC indicate such. For instance, you would sign any paperwork as John Q. Smith for ABC LLC.
If You Operate Your LLC Outside Its Purpose
Piercing the Corporate Veil
If you do business outside the scope of your LLC’s purpose, then the court can set aside the protection you should receive from your limited liability company. This is called piercing the corporate veil.
To determine whether you lose protection from personal liability, the court considers whether:
- your LLC is operated as a distinct entity
- you commingled your personal and business bank accounts
- there are records of your LLC’s activities
- the business’ debt far exceeds its equity
- you have any assets in the LLC’s name
- you disregard legal formalities in general
If the court finds that you are not following corporate formalities or that you are commingling business and personal funds, it may find that you should be held personally liable for actions on behalf of the LLC.
Tips to Maintain Personal Protection
There are a number of ways to ensure your protection from personal liability. One is to properly form your LLC from the beginning. Be sure to create an operating agreement even if you are the LLC’s sole member.
- Keep your LLC’s banking separate.
- Maintain corporate records.
- Follow corporate standards
Be sure to appropriately sign business contracts. Include your title and the name of your LLC in your signature. Also, be unambiguous about your LLC status. Display the LLC’s name on business cards, credit cards, checks, and so on.
Need Help with Your LLC?
There are many benefits to forming an LLC, from ease of formation and flexible management to limited personal liability and business credibility, but deviating from the rules can lead to trouble. Set up some time to meet with one of our experienced litigation attorneys to discuss your business formation questions. Call 303-688-0944 to begin your free case assessment.