Article 2

ARTICLE 2

THE CONDUCT OF THE AFFAIRS OF AN LLC SO THAT THE MEMBERS OF THE LLC ARE NOT LIABLE FOR LLC DEBTS

This is a general advice letter with respect to maintaining separation between yourself as an individual and your LLC, so as to avoid personal liability for the obligations of the LLC.

You cannot be too careful in conducting the affairs of a sole member LLC so as to protect you as the individual member from liability for the debts and/or obligations of the LLC.

Typically if a claimant has a claim against an LLC that is in excess of the LLC’s assets, then the claimant will try to find a way to have a court declare that the owner conducted business in a way that exposed the owner’s personal assets to liability. For example if the owner mixes or uses personal assets in the business a claimant could argue that those personal assets were subject to attachment by a business creditor. This can also occur where an individual borrows money or runs up major trade obligations in the name of the LLC, but takes the money or assets for personal use, leaving the LLC with no assets for the creditors. The courts also disregard the entity where a member tries to hide behind an LLC to engage in fraudulent or criminal activity.

Here are some suggestions you should follow to keep a separation between yourself and your LLC so as to avoid giving any claimant a basis to try to argue that your LLC should be disregarded.

The LLC should always conduct business in the name of the LLC. The assets and affairs of the individual member should never be commingled or used by the LLC. The LLC should immediately open a bank account in the name of the LLC. The bank should be provided the new taxpayer identification number assigned by the IRS. Individual bank accounts or individual cash funds should never be used to pay the bills or to fund the obligations of the LLC and vice versa. Operating funds, if needed, should be contributed by individual check to the LLC’s bank and denominated on the check as a contribution to capital. The LLC should not be underfunded at the inception. There should be sufficient operating capital on hand to take care of expenses until revenue is received. All LLC checks should be signed indicating the representative capacity of the member. E.g., John Q. Doe, Member. Expenses and other payments may be made using the checks of the LLC. If any payments for salary, member distributions or reimbursements are to be made by the LLC to the member then it should be by check with the purpose clearly stated on the check. The LLC should retain and use the services of an accountant that knows how to handle LLC accounting.

The LLC’s identity should always be maintained separately from the individual member. The Individual member should never sign any document for the LLC without indicating that the  member is  signing on behalf of the LLC in his representative capacity: for example, letters, proposals, and any other documents of the LLC should always be signed John Q. Doe, LLC, By: John Q. Doe, Member. The LLC should obtain and use on all billing and reporting forms its Federal taxpayer identification number. The LLC should have its own stationary, envelopes, invoices, fax cover sheets, and telephone number. A separate telephone listing is desirable. Individual letterhead should never be used for LLC purposes and vice versa.

The LLC should observe all formalities that indicate that it is operating as an entity that is separate from its member. All required tax forms and annual reports required by the state should be timely filed. If a substantial business presence is undertaken in another state then consideration should be given to registering in that state as a foreign state LLC doing business in the host state.

The LLC should never use the property or assets of the members in the business. Such assets should be leased or contributed to capital.

The LLC should adopt a resolution appointing an officer and/or manager who is authorized to act on behalf of the LLC.

The LLC should prepare and keep a limited liability company official document and minute book. The Articles of Organization should be filed there along with any other organizational documents from the state. The IRS notification of taxpayer identification number should be filed there. Any documents relating to membership interests should also be filed. The LLC should always prepare minutes and/or resolutions authorizing the member to take any major action on behalf of the LLC (e.g., the purchase of a major asset, opening a bank account, bank borrowing, asset transfers and the like) so that it is always clear that the action is being taken by the member on behalf of the LLC and not by the member himself.

All contracts should be entered into by and on behalf of the LLC. It is the LLC that is providing consulting services and not the individual member. The member should always sign each report, letter, etc, as John Q. Doe, LLC by John Q. Doe, Member.

In all cases the property and affairs of the member and the LLC should be kept entirely separated.

The insurance policies should reflect that John Q. Doe, LLC is operating as an LLC.