Forming an LLC for a new business
When starting a business, you should strongly consider forming a legal entity, such as a limited liability company (LLC), to operate the business. (While this post specifically addresses LLCs, note that many of the same benefits can be achieved by forming other legal entities, such as corporations or limited partnerships.)
One of the key reasons for organizing an LLC is to protect the owners of a business from exposing their personal assets (for example, their home, savings, and wages) to the business’s creditors and claimants. However, as discussed below, simply forming an LLC is not enough by itself to ensure protection of a business owner’s personal assets from claims by creditors and claimants.
As a starting point, an LLC and its owners are treated as separate legal entities, and the owners of the LLC are not personally liable for the debts and obligations of the LLC. However, when owners take actions that undermine an LLC’s independent legal status, or otherwise engage in wrongful or fraudulent conduct, a court may allow a creditor or claimant to “pierce the veil” of the LLC – i.e., to disregard the liability shield/protection and hold the owners of the LLC personally liable for claims against the LLC.
Here are some steps you can take to help minimize the risk that a court would “pierce the veil” and allow creditors and claimants to pursue the personal assets of the LLC’s owners.
- Keep personal assets separate from LLC assets. Maintain a bank account for the LLC that is separate from your personal account(s). Do not withdraw money from the LLC’s bank account to pay personal, non-business related expenses. Similarly, do not pay business expenses out of a personal account. Document all deposits and withdrawals associated with the business.
- Make sure that the entity is adequately capitalized. Ensure that the LLC’s bank account has sufficient funds to pay the company’s debts and expenses as they come due. In addition, you will want to have the entity own or lease the assets used in the business.
- Use the LLC’s full name, not your individual name. When dealing with third parties (e.g., vendors or customers) or engaging in advertising, refer to the LLC by its corporate name including its “LLC” designation. Following this practice helps to ensure that third parties understand they are dealing with an entity with limited liability. For example, when you enter into contracts on behalf of the LLC, sign in a way that indicates you are signing on behalf of the LLC. For example:
By: Jane Johnson, Member and Manager
- Comply with corporate formalities and document corporate action. Follow and document compliance with your LLC’s legal and corporate formalities. Wisconsin LLC law imposes fewer statutory formalities on LLCs than corporations; however, to the extent the LLC does impose formalities – for example, when an Operating Agreement requires a unanimous vote at a meeting of members – you should follow those formalities and document compliance. You should also ensure that you timely make any filings required by the State. For example, Wisconsin law requires LLCs to file an annual report and pay a $25 filing fee each year.
- Of course, always avoid misconduct. If a court finds that you have used the LLC to commit fraud or other misconduct, it will be much more likely to “pierce the veil” and allow creditors and claimants to pursue your personal assets.
By following the principles above, among others, you can help to reduce the likelihood that personal liability will arise in connection with the activities of your business.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.