Limited liability refers to the protection that you, and your personal assets, enjoy against creditors and lawsuits brought on by activities carried out by your business. Another term for this protection is ‘corporate veil’. Think of it as a metaphorical barrier between you as an individual and your business. It’s what separates you, legally, from your business. What’s the big deal, you might ask? After all, it’s not like you’re doing anything illegal. Allow me to explain.
As an entrepreneur, choosing the right organizational structure for your business could save you a ton of headaches in the future. Although the ease of starting and operating your business as a sole proprietor might seem inviting, trust us, a little extra work up-front is worth your time. We get it, with the millions of things you already have on your plate trying to get your awesome idea off the ground, taking a longer and harder route can just seem like another obstacle on your path.
But, here’s the thing, we know, and you know, that this business is not just an idea for you. It’s not just something you are playing with this week or this month. You care deeply, and so do we, your WISE WBC team, about your business making it in the long haul. For that reason, if avoiding headaches in the future isn’t motivating enough, consider this careful planning upfront as foundation to the future success of your business.
In this article, we’ll cover some basics on creating and maintaining limited liability as a business owner. We will, then, share a customizable checklist that you can use for your business.
First and foremost, in order to establish a limited liability, or to set-up that metaphorical ‘veil’, you need to choose the correct business structure. Sole proprietorship is NOT it. It’s a personal choice and the decision is yours, but if you’re concerned about protecting yourself and your personal assets, then there’s a better option. Registering your business as a Limited Liability Company (a.k.a. an LLC), provides that liability protection. There are other business structures, but LLC is most commonly used by small business owners.
Later, I will get into more detail, but for now, these are general steps on creating and maintaining that limited liability:
- Create solid Operating Agreement (this is the key, click here to learn more)
- File your Articles of Organization with the Secretary of State; or file online; Read this article to learn more about what Articles of Organization should include;
- Publish a notice that your LLC was formed in two different newspapers; read here on how to get that done;
- File Certificate of Publication (basically a proof that you did step #3);
- Get an EIN (it’s like a social security number for your business);
- File the ‘Biennial Statement’ with the State or online every two years.
- Open a separate bank account and a credit card, if needed, for your business;
- Get liability insurance;
- On an ongoing basis:
- File all required tax forms;
- Document ALL transactions and decisions of the business;
- Do NOT ever commingle business and personal finances (mingling might be fun in other areas of life, but it’s a huge no-no in business);
- Follow your Operating Agreements down to a T
- If circumstances changed, and an amendment is warranted, go ahead and formally amend that Operating Agreement (meaning, document why, how, and when the change is taking effect);
- If you’re a multi-member LLC, hold regular meetings with members and keep a record of notes that explain what was discussed at the meeting, what decisions, if any, were made and how they’ll impact the business, whether or not additional members were added, etc. If you’re a single-member LLC, this is not necessary.
Steps on maintaining your organization’s corporate veil:
- Make sure you have a paper trail of every financial transaction, even if there’s no cash exchanged. This includes but is not limited to:
- Purchase agreements and/or vendor receipts for materials, inventory, supplies, and equipment;
- Sales receipts and/or invoices and contracts for all sales;
- Receipts for all refunds or credits given to customers;
- Documentation of any and all sources of funds for your business. This includes but is not limited to:
- Funds you personally invest or lend to your business. Depending on what you have in your Operating Agreement, these funds, big or small, will either be refunded to you or will count towards your ownership in the business.
- Any loans you got for your business from a bank or private lender. Do NOT ever borrow money personally on behalf of your business. This means, do not apply for a personal loan. In other words, you should never use personal assets and personal credit score to obtain a loan for your business.
- And and all investments (financial or in form of a service);
- Donations and other contributions;
- Sign checks, contracts, and any other document that requires a signature with your title and not just your name, to make it clear that you are acting on behalf of your business. For example: instead of signing as ‘Jane Doe’, sign as ‘Jane Doe, CEO of Widgets and Things, LLC’’;
- If you are a multi-member LLC, make sure to hold regular meetings with other members. These are some things to adhere to:
- Send out announcements about the scheduled meetings, even if your partners live in the same house and you can personally just tell them about the meeting. Remember that paper trail?
- Make detailed notes of the issues discussed and voted on in the meeting.
Phew! If that is a lot and you need more guidance, contact WISE WBC to schedule a 1:1 with one of our business counselors at email@example.com.