Hello everyone!
You're watching episode 5 of All Up In Yo Business.
I am attorney Aiden Kramer with The Law Office of Aiden H. Kramer in Colorado.
In this episode of All Up In Yo' Business, I am going to talk about single-member LLCs,
some of the risks that come along with being in a single-member LLC, and some of the ways
to avoid those risks.
First of all, the owners of an LLC are referred to as "members."
So a single-member LLC is an LLC that only has one member, or one owner.The primary purpose
of forming a limited liability company, or an LLC, is for that limited liability.
The personal assets of the members or the owners are protected from debts and liabilities
of the company.
When the company incurs debts or if it gets sued, typically the personal assets of the
members will be protected.
But there are sometimes way for creditors to get to those personal assets.
This is referred to as "piercing the corporate veil."
You have to envision that a corporation or an LLC has this "veil" of protection for personal
liability for the owners.
When a credit of the LLC can get to the assets of the member, they are piercing that protection.
So that's where that term comes from.
One of the principles of piercing the corporate veil is referred to as the "alter ego doctrine."
It basically means that there is no separation between the owners of a company, i.e. the
members of an LLC, and the LLC.
And that the members are just using the LLC as a way to avoid liability.
Piercing the corporate veil is especially risky with a single-member LLC.
It's mainly because there are no other members to make sure that single member is doing things
correctly and there are no other members to put that distance between the single member
and the company.
So it just makes it a bit more risky for the creditors of the LLC to get to the personal
assets of the member.
But, given those risks, there are a few simple things that a single-member in a single-member
LLC can do to protect that limited liability and avoid creditors piercing the corporate
veil.
One of the most important things to do if you are the member in a single-member LLC
is to follow legal formalities.
Pretend you are in a multi-member LLC and do all the things you would do in that instance.
For example, if you were in a multi-member LLC, you would hopefully have an Operating
Agreement.
The Operating Agreement is the instructions and guidelines for how the LLC is operated:
what the responsibilities of each member are, what happens if there is a disagreement between
the members, how the members get paid.
It is the guidelines for the members to follow in operating the LLC.
So if you are a single-member LLC, you still need to have that Operating Agreement.
It may seem a little weird that you are putting these guidelines together for yourself.
You may think, "I'm the only owner here, I can do whatever I want.
Why do I need to follow guidelines?"
Well, if you do that, then you are basically acting like you aren't in an LLC, so why should
your assets be protected?
You need to act as if you are in a multi-member LLC and follow those same steps.
So you need to have a good operating agreement drafted, either by yourself or by an attorney,
that specifies how you get paid, what types of things the business does and doesn't do,
and you need to follow that operating agreement.
Other formalities would be keeping adequate records such as tax records, keeping minutes.
If you were in a multi-member LLC, the members would have meetings, and they would keep minutes
of those meetings, or notes documenting what was discussed and decided at the meeting.
So you may think, "how am I going to have a meeting with myself?"
That's exactly what you need to do!
If you are driving in the car thinking about business and you decide to do something or
change something with the business, you need to write down those decisions, and call them
"minutes."
Same thing if you make a big decision or decide to change something, you need to make sure
you have written record of that decision and that authorization to do those things with
the LLC, just as you would with a multi-member LLC.
The next thing that is important to remember is having adequate capitalization.
Some people would think that one of the easy ways to avoid liability would be to not have
any money or assets in the LLC.
If a creditor sues the LLC and the LLC doesn't have any money or any assets, then the creditor
can't collect anything, right?
No!
You can't do that.
Intentionally under-capitalizing the LLC would put you at risk of having your personal assets
be subject to the liabilities of the LLC.
So you need to make sure there is adequate capitalization in the LLC and enough money
for the business to operate.
The third item is the most important one, because it is the easiest for a single-member
LLC to mess up.
You must avoid commingling funds between the member and the LLC.
With a single-member LLC, it is so important to keep business funds separate from personal
funds, and that is probably why it is so easy for people in a single-member LLC to screw
this part up.
You think, "the business has a little bit of money, I'm a little short this month, I'm
just going to borrow some money from the LLC.
No one will ever know, who else is here to care, I'll just do it."
Wrong!
Keep everything separate.
If you use your personal funds to capitalize the LLC in the beginning, that's fine, just
make sure you keep record of it.
Call it either a loan or a capital contribution.
Just keep record of all the money that you personally put into the LLC.
If the business is short on money one month and you have enough money in your personal
account to pay a bill, you cannot just go writing checks out of your personal account
to pay business expenses.
You need to make a capital contribution to the LLC so it becomes the LLC's money and
then pay the bills from the LLC's account.
So keeping your personal funds separate from the LLC's funds is probably one of the most
important things you need to do if you are in a single-member LLC.
Finally, along the same lines, it is also important to make sure you represent yourself
and act in your capacity as the owner of an LLC.
If you are signing a contract or entering into any binding agreement, make sure you
sign it in your capacity as a member of the LLC.
So you would, for example, sign a document as "The Law Office of Aiden H. Kramer, LLC
by Aiden Kramer, Owner."
You would NOT just sign as "Aiden Kramer."
You need to specify that it is the LLC that is entering into this agreement and signing
the document, and that you are doing it on behalf of the LLC.
So those are a few of the most important steps that need to be taken in a single-member LLC
to avoid that risk of becoming an alter ego of the LLC and having a creditor be able to
pierce the corporate veil and get to your personal assets.
So, despite those risks, if done correctly, a single-member LLC can still be a good business
entity and a great way to keep your personal assets protected from the debts and liabilities
of the LLC.
As long as you follow the rules.
Do what you're supposed to do, and in most situations, you can usually avoid that risk.
And it certainly can't hurt to attempt to avoid those risks by following the formalities,
keeping assets separated, and doing the things that you are supposed to do.
In that situation, a single-member LLC can still be a good thing.That's all for this
episode.
If you are in Colorado and would like to speak
with me personally, feel free to contact me.
Thank you so much for watching.
I'm Aiden Kramer, and I'll see you next time.