Hey guys, it's Clint Coons here.
And in this video I'm going to discuss why LLCs fail.
Okay, let's get started.
So why do you hear about limited liability companies not protecting
their members of the manager in the in the event of a lawsuit?
Why are they failing?
Well, really comes down to how people operate,
their limited liability companies.
I mean, there's a few steps here that I'm going to go through
that can pretty much prevent your LLC from failing in the event of a lawsuit.
So what is the first mistake that I find people make
when it comes to their limited liability companies and why they fail?
Number one, they fail
to renew
their entity.
So what? I mean, failed to renew.
So here's the deal.
Each and every year, most states, 95%
of the states require that you file an annual list
or some type of annual report with the state and pay a fee.
Some states, it's every other year, but whatever it is, filing that
each and every year is required in order to keep your LLC compliant.
Failure to file that annual report will result
in disqualification of your limited liability company, where it can move
into delinquent status and then become administratively dissolved.
Now I've met many people who've come to me before
and they say I have an LLC set up in this state,
or I have an LLC set up over here and we pull up the LLC only
to find out that it had been dissolved four or 510 years ago.
Most recently, we had a client that wanted to renew an LLC in Nevada
that they had let go defunct by not renewing it because they forgot.
Many times it's because people move and the fee
to reinstate that entity was over $8,000.
Now, other states, it's impossible to reinstate it.
So this can create problems for you.
Try to sell property in an LLC that's been administratively dissolved.
You're not going to be able to do it.
You're going to cloud the title on the property.
So that is the biggest mistake people make with their LLC.
That is by not renewing them.
All right, so the second mistake that we make with the LLC is failure
to follow
formalities.
What do I mean by failure to follow formalities?
All right, so here's a situation.
There was a individual that attempted to transfer his membership interest
to his spouse to avoid a creditor's claim on his LLC.
Now, he probably would have succeeded, but the problem was, is that he
the steps he went through to transfer his interest were not consistent
with what was required in the operating agreement.
So that transfer was held to be null and void.
And then that individual, that creditor, the creditor was able to hold that
individual liable for the debt, saying you are in fact, a member of this LLC.
So when you set up a limited liability company, there are certain formalities
you must go through in order to take certain actions.
And if you don't follow those formalities, then you run into problems
like I just described.
Or better yet, you they could say that you're operating outside
the bounds of the LLC and you have personal liability.
So following formalities is really important.
Third thing co-mingling funds.
All right, so what do I
mean by co-mingling funds?
Let's say that you're going to receive a check from someone.
Maybe it's a sale of a piece of real estate held in your own name,
and you direct them to send that money to an LLC that you set up
and not to you individually.
So by doing that, what you're doing is you're taking personal assets, money
that was owed to you and you're directing it to be paid into your LLC.
That is what we mean by co-mingling.
You're taking your personal moneys and you're putting them in your LLC
the way that would work or should work if I had an LLC right here
and I was going to receive some some cash from someone,
I would have them pay me the money
and then I would turn around and contribute to the LLC.
Now you can say, Oh, I can just avoid a step.
I'll just have to pay directly to the LLC itself.
But by doing that though,
you're starting to co-mingle what is personal versus what is business.
Now yes, it is the same funds, but it is the steps
in which you go through to put those funds into the LLC.
That is important and that's what you want to avoid.
Is this co-mingling of taking personal assets
with business assets and making them essentially indistinguishable.
All right.
So the other issue you run into, the fourth issue
with having an LLC that causes them to fail is paying
for personal expenses.
All right. Through your limited liability company.
So your LLC, maybe it's a rental LLC over here,
you have a little cash inside of there.
You've got six k.
Well, you want to put a down payment on a commode or a tractor.
So what you end up doing is
you write a check from the LLC to the Kubota dealership
to buy that tractor that you're going to use personally.
Or maybe it's on, on you've got a small little farm you want to run it around on.
It's not part of your business.
Actually, you should have figured out a way to write it off.
Hopefully you're working with our tax department sidebar.
But anyways, you pay that six k over to the Kubota dealership for
what is personal.
What you're doing now is you're setting that LLC up for failure.
So if you get sued, they're going to pierce the veil
because now you're using these funds as your personal checkbook.
Just like what I set up here.
Don't co-mingle funds paying for personal expenses.
The way that would work is you would take a distribution to yourself of $6,000
and then you would write the check to that Kubota dealership
for that tractor that you're buying
and not pay for it
out of the limited liability company itself.
Now, the fifth reason I find taking
consistent distributions.
Okay, so what do I mean
by taking consistent distributions?
So with a limited liability company over here, you can
of course, you knows your LLC.
I just showed you how you would take six K out to buy your tractor.
So let's say I have this LLC set up here
as a property inside of here, and the property generates
me after expenses, 1200 dollars a month and I'm down here now.
It makes 1200 dollars a month.
After all the mortgage and all the other expenses are covered.
So each month, on the eighth of every month, I take out
1200 dollars and I put it in my personal
checking account because I'm the member of that LLC.
Now the problem
with taking out distributions like that on a monthly basis, the eighth
or maybe it's attempt some months and it's always the same amount
or really close to it
is that if
you're ever involved in a lawsuit and somebody gets a judgment against you.
So here's a creditor over here.
They get a judgment against you
and they put a charging order on your LLC stadium, $100,000.
So if you watch my other videos
on charging orders, what it means is that if you take out
a distribution like you did right here, you have to pay to your creditor.
Well, obviously, I would stop taking distributions
if the court told me if you take out
another distribution of 1200 dollars, you got to pay to your creditor.
Well, I'm done taking distributions.
But the problem you have is that you now have a history
of taking out 1200 dollars a month on the eighth of every month.
And if you stop the creditor can come back
against you and force you to restart.
Now, you probably scratch your head going, Well,
how can they do that if I control the LLC?
Because the argument they're going to make is that there was no legitimate business
reason for you to stop taking those distributions, that you only did it
because there was a creditor who has a charging order on your interest.
So when it comes to pulling money out of your LLC,
don't take it on a consistent monthly basis
and don't take the same amount accumulate there for three months.
And then maybe you pull out 20 $800 in the next time.
Maybe a month later you pull out another 1500 dollars.
And so different amounts at different times
is the way to go when you're running your losses.
And then the sixth point about this, which is, again,
one of the most important things, mistakes, is people do not read
their operating.
I'll just put up operating agreement, their LLC operated agreement.
You don't know what's in your LLC operating agreement.
You need to read it because if you read your LLC operated
agreement, it's an instruction manual on how you're to run your business.
And if you're ever involved in a lawsuit and you're not running your business
per the operating agreement that you've set up for yourself,
then you open the door to liability where they can pierce the veil of the LLC
and hold you personally liable, or reverse pierce it to you
and then break the LLC to get after the assets that are held inside of there.
So these are the six things that that I find that I think are mistakes
that people make that caused their LLC to fail
and of course are other ones you can come up with
that could be on this board as well.
But I wanted to give you the top six from my point of view.
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setting up the proper limited liability company for your investing business.
Take care.