LLCs Part 6: LLC Traps - don’t get caught in one!

This is the sixth in a series of six videos that will help you protect your personal assets.

Traps for your LLC

There are a number of traps or stumbling blocks to derail your liability or asset protection. Let's look at how attacking attorneys or the IRS might disrupt the protections your LLC or small business corporation provides.

Here are 7 traps to avoid:

Signing Agreements

Sign with your name, title, and company name – not just your name. I see owners miss this one all the time. Related to that, think about what is on your business card, email signatures, and marketing materials. Be a representative of the company, don’t sign with just your name.

Capitalization

Not having enough cash and assets on hand to meet the need of your business is a sure sign that your LLC or small business corporation isn’t “real under the law”. This means creditors and others might pass right through the company and pursue your personal assets.

Do you drain all or most of the money out of your company every year? That’s the most common way to mess this one up. You must maintain enough in the company to meet your regular expenses and have an adequate reserve.

Determining how much that is can be difficult. it is a facts and circumstances test. Your CPA can help you make this calculation and update it as it changes all the time.

Business Purpose

There must be a business purpose for your LLC or small business corporation. Without it you likely have no protection. A common example is you can’t just put your home into an LLC and think you are protected. There is no business purpose, only a desire to fend off creditors and lawsuits, and that’s not enough.

Paying Company Bills

Never pay company bills with personal funds (or a personal credit card). That puts your liability and asset protection at significant risk. Remember the video in this series on the topic “the two shall NOT be one”.

Paying Personal Bills

Related to the last one, never pay personal bills with company funds (or a company credit card). Again, that puts your liability and asset protection at significant risk. Remember the video in this series on the topic “the two shall NOT be one”.

Using Company Assets

If you use company assets (a company car, cell phone, laptop or other equipment) you need to document the fact you did and pay the going rate for it. It must be paid for at fair market value or possibly the value included on your W2. It could be documented with minutes, a company policy, and proper tax accounting.

Selling the Business or Some of its Assets

When you sell your business or some of its assets or equipment, the proceeds of the sale need to go directly to the owner of those assets, usually the company. Have the funds sent directly to the company account, not one of your personal accounts. You can always properly document and take it out of the company later.

Wrap up

Those are just some of the traps and issues I see on a regular basis. It takes self-discipline and time to learn how to do it right and then to actually do it. I encourage you to protect your personal assets as much as you can so please follow through.

So, what do I do?

I hope this video series helps you maintain liability and asset protection for your LLC or small business corporation. If you have questions you may find answers online or with your advisor or attorney. If you have questions for me, you can contact us here.

Check out my other videos for more ideas and if you like this video, please subscribe.