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.

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.