Updated: Feb 4
As a solo entrepreneur and a single member LLC owner, do you know if you’re running your business the right way? Are you maintaining important documents, filing necessary reports and returns, and documenting important decisions you make on behalf of the LLC?
Chances are you don’t think that the formal LLC stuff doesn’t apply to you because you’re a solopreneur.
When you were starting your business, someone told you that you should form an LLC to protect your personal assets. So you went ahead and did it. LLCs are easy to set up in most states. You probably did it yourself or found a DIY kit online. Once you filed, you thought that no one could touch your personal assets. The reason you form an LLC is to create a shield between you as an individual person and your business. But if you don’t do the right things to keep yourself and your business separate, then you run the risk of someone piercing the corporate veil in court, which means that a creditor of the LLC creditor could get access to the owner’s personal assets if the LLC doesn’t have enough funds. So here are a few steps that single member LLC owners should take to maintain a clear separation:
Get an operating agreement. An operating agreement is a contract between the members of an LLC, much like a partnership agreement. It sets out the duties, rights and responsibilities of the members. Many states don’t require single member LLCs to have an operating agreement. So do you really need to have a contract with yourself? Yes, you should have an operating agreement even if you don’t have partners to avoid jeopardizing your LLC status. An operating agreement is a key document that shows your business operates like a legit company. Investors and banks may want to see your operating agreement as proof that you own the LLC. An LLC’s Articles of Organization don’t identify the members of the LLC. The operating agreement is a legal contract that shows who is the owner and member of the LLC.
Follow corporate formalities. Corporate formalities like holding annual meetings, and keeping records and minutes of important decisions made at meetings for the LLC are not things that single member LLCs typically do. It sounds ridiculous to have a meeting with yourself and write down minutes of that meeting. But here’s what I suggest, every time you’re thinking about your business and making a decision, whether it is to seek a loan from a bank, or raise money from friends and family, write it down, put down a date and approve your decision. Think about it as maintaining a diary or journaling for your business.
Don’t commingle your funds and assets. You need to keep your personal and business affairs separate. Don't use personal finances for business purposes and vice versa. For example, don’t write a check from your business account to pay your home mortgage or to buy a dress for your friend’s wedding. If you need to pay off a business expense and there aren’t enough funds in your business bank account, don’t pay it out of your personal bank account. Instead, write a check to your LLC and record it as capital contribution and then make payment from your business account. This is such a common mistake and so important to keep in mind. If you commingle your finances, it’s easy for someone to have that corporate veil pierced because then you’re projecting that you and your business are one and there’s no real barrier to protect your personal assets.
Make sure the world knows that it’s dealing with an LLC. You can start by getting business cards, letterheads and a website with your LLC name conspicuously featured. Always enter into business contracts as an LLC and sign as a representative or member of the LLC. For example, if you are signing a contract on behalf of Sassy Sally, LLC, your signature line should read Sassy Sally, LLC, by Sassy Sally as owner or member of Sassy Sally LLC.
At Nupur Shah Law, we help business owners structure deals and documents. We help with reviewing your work and determining the best possible protection available to you. Call us at 646-820- 1366 or email us at email@example.com. I am happy to have a complimentary conversation with you on how to secure your rights.
Working with an attorney to secure your business can help avoid trouble later on. Nupur Shah Law can help you if you have questions about your business.