Why are LLC’s so common?

Adam Keilen

What should I be doing if I already have one?

Limited liability companies (LLC’s) offer LLC owners personal protection from business debts, lawsuits, and other liabilities, just like a corporation does for its shareholders. The key difference between an LLC and a corporation is that a corporation pays its own taxes, whereas an LLC is a pass through entity, meaning the profits and losses pass through to the owners who report the same on their personal tax returns, much like a partnership or sole proprietorship. In addition, running an LLC is much easier than running a corporation, thus, there are fewer governance rules and restrictions.

What does it mean to have limited personal liability?

Again, like corporations, LLC owners are personally protected from business lawsuits and creditors, meaning that if the business is sued, or owes money to creditors, the claimant or creditor cannot legally make a claim against the LLC owner’s personal property, like a home, car, cash account, or some other possession. Only the LLC’s assets can be used to pay off business debts, or pay claims – in other words, the only exposed assets are those held in the LLC.

Can claimants or creditors ever come through the LLC, or “pierce the corporate veil”?

Under Michigan law, it is very difficult for claimants or creditors to “pierce the corporate veil,” and thereby come after the LLC owners’ personal possessions; however, if a court decides that the owners are really doing business in their individual capacity, then the owners may become personally liable. This can happen in the following ways:

  • Funding. The LLC should have enough cash to pay its day-to-day expenses; if it doesn’t, the owners are at a greater risk.
  • Misrepresentations. If an LLC owner conceals or misrepresents material facts about finances to creditors, the owner may be deemed to have acted personally.
  • LLC Funds v. Personal Funds. It is vitally important for the LLC to get a Tax Id# and open a business checking account. Commingling personal finances and business finances is one of the most common ways to “pierce to corporate veil.” For example, do not use a personal checking account to pay for business supplies.
  • Create an Operating Agreement. Having an operating agreement for your LLC lends credibility to your LLC’s legal existence, thereby formally distinguishing it from your personal capacity – don’t overlook it.

The Take Away. LLC’s are common because they have the same liability protection as corporations, yet, without the tax consequences, and LLC’s do not have sophisticated corporate governance requirements; however, owners of every legal entity must be sure to carefully maintain their liability shield with prudent business practices.

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