LLC and Asset Protection
“It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.”
-Miguel de Cervantes, in Don Quixote
As many investors know, one key strategy to protecting your assets is to divide and diversify. For the small business owner, this means separating your business and personal assets. While there are many, many methods to doing so, the most common under Oklahoma Law is forming a Limited Liability Company (or LLC). An LLC provides the small business owner with many things, but the most poignant of which is its namesake: limited liability.
So, you probably ask, what IS limited liability? To put it simply and without resorting to legalese, limited liability is protecting your personal assets from business debts (or liabilities). If created, maintained, and operated correctly, a LLC prevents a business debt from being levied against your personal assets (like your car, home, or personal bank account). If not done correctly, a LLC is simply a legal figment.
The next question then, is how does one correctly (1) create, (2) maintain, and (3) operate an LLC to ensure it provides protection to your assets.
CREATING AN LLC:
Under Oklahoma Law, it is super simple to form a for-profit LLC. These types of LLCs are what nearly all small businesses will be categorized as. The first step is to find a name that matches the naming requirements under 18 O.S. 2008 and is not already taken. The naming requirements can be boiled down to the inclusion of LLC, LC, L.L.C., etc. in your company’s name. Secondly, you have to make sure the name is not already taken by searching the Secretary of State Website found here.
The next step is to download and complete the Articles of Organization. The forms can be found here. As a part of these forms, you will have to choose a registered agent to accept official mailings. This registered agent will accept service in the case of a lawsuit and receive correspondence from the state. The Articles of Organization also include your company name, term of existence, and contact information.
The next step is to register for an EIN and/or with the Oklahoma Tax Commission (especially important if you are collecting a salary from the company or collecting sales tax).
MAINTAINING AN LLC:
Maintenance of a general for-profit LLC is quite simple. There is an annual filing requirement with the Secretary of State. Further, ensure that if your business relies upon a trade/business license, your LLC is included under that certification.
Obviously, you should also separate all of your assets to ensure no co-mingling (discussed below). So make sure you have different bank accounts, debit/credit cards, etc. etc.
OPERATING AN LLC:
Once your articles of organization are filed with the Secretary of State, your LLC is officially formed. However, the prudent small business owner should not stop there. The next step would be to craft an operating agreement. While this step is not necessary, as Oklahoma Law provides default rules to business that lack an operating agreement, said agreement provides the customization aspect of an LLC.
An operating agreement governs how your LLC will be run and operated. It is a binding agreement between all members (owners) of an LLC. The agreement includes procedures for voting, buying/selling ownership interest, dissolving the business, admission of additional owners, initial capital contributions, distribution of profits/liabilities, and the powers/limitations of the members. At H&H legal, during a consult for an operating agreement, there are 7 steps we like to discuss to cover all of these factors.
Operating agreements are particularly necessary if there are multiple owners, capital investors, or verbal agreements pertaining to a business.
CO-MINGLING and LOSS OF PROTECTION:
A Limited Liability Company only provides protection if it is actually a company. A LLC is not a legal shell-game to be played with business creditors. Limited Liability is a great legal mechanic, but it is not an omnipotent one. You, personally, can still be liable for business debts if (1) you have been comingling assets, (2) your corporate veil can be pierced, (3) you were acting outside of your company duties, or (4) you fail to maintain your LLC through annual filings.
Comingling assets simply means acting as though you and the company are the same. This means sharing a bank account, personal purchases coming from the company account, obscene use of reimbursements, etc. etc. Essentially, you have to ensure that you (personally) and the LLC are separate entities.
“Piercing the Corporate Veil” is legalese for showing that the corporation and the individual are not separate entities. This litigation strategy relies upon business filings, comingling, and other methods to show that the company is simply a shell for the individual.
A LLC also does not protect you for actions outside the scope of your duties under that LLC. This is an agency requirement. Essentially, if you wreck the company vehicle while going grocery shopping on the weekend, you were acting outside of your corporate duties. A LLC only protects you if you are acting under that LLC.
Finally, as stated above, an LLC must be maintained. If you fail to file your annual requirements, then the company lapses. It does not protect you if the company is not in good standing with the Secretary of State.
CONCLUSION:
If you are operating a small business or have concerns regarding an already created LLC, please do not wait to give H&H a call. A LLC that is not correct offers no protection. Further, if you wish to have an attorney review or draft an operating agreement, H&H will be happy to offer their expertise.