How to set up LLC (and keep your liability protection)
Episode 32 on the Business Bites Podcast
The Gist Of This Episode: You have decided an LLC is the best formation for your business, but how do you get started? In this episode, Rachel will walk you through the process plus give you tips on maintaining it.
What you will learn:
Reasons why a CPA should not file your business formation documents
Steps to set up an LLC
What “piercing the corporate veil” is and how to avoid it
Welcome to the Business Bites Podcast, the podcast for busy entrepreneurs. Whether you’re an online entrepreneur or seeking after a brick and mortar success, this podcast brings you quick bites of content, so you can learn and grow anywhere you are. Now, here’s your host, Rachel Brenke.
Hey guys, welcome to the Business Bites with Rachel Brenke. This is episode 31. We’re going to be talking about LLC’s and how to not pierce the corporate veil. Some of this translates over to corporations as well, but I’m focused primarily on LLC’s because if you heard the last episode, episode 31, which you can find at RachelBrenke.com/epi31, I talked about the business entities, did a little one-on-one crash course for entrepreneurs. Now, I really want to dig a little bit more into LLC’s because I feel like limited liability companies, or LLC’s as I’m going to refer to it, are really one of the best business structures for you guys to have the separate liability protection, the two little buckets on the shore. If you don’t know what I’m talking about, you need to go listen to that episode, but it’s going to allow you to have this peace of mind, this separate bucket liability protection, lends some professionalism. It just does a lot of things to really help your business. It can also put you into some options for tax elections that give you some tax benefits as well.
For this episode and this quick bite, I just wanted to talk to you guys a little about how to set up the LLC, then also some of the top ways to not pierce the corporate veil. None of this substitutes for legal advice. This is what I do on a regular basis, I tell all of my clients, but I’m not going to be able to give you specific examples because we’re not sitting one to one in front of each other in our office. In fact, I’m sitting by myself in my office. A little lonely today, so that’s why I’m talking to you guys.
How to set up an LLC, get out your pen and paper. If you have already done this before, please use this as a checklist to make sure that it was done properly. Whether you did it yourself or you had an attorney do it, here’s my little soapbox time to tell you please do not have CPA’s filing your business formation documents for you, LLC’s, corporations, any of that. They should completely, 100%, be focused on the tax stuff and not creation of businesses. Not only do they not necessarily understand how to do it, and I get that filing papers can be relatively easy, but they are not often credentialed and licensed to be able to do it, which can be an unauthorized practice of law and they don’t often understand and recognize the liability and other things that may come into play or be able to provide you the legal advice meant to maintain your separate liability bucket protection in the LLC or corporation protection.
Alright, so piece of paper out. That was my little soapbox. Let’s [move in 00:02:41] how to set up an LLC. First, I want you guys to choose a name that is not already taken within your state because it’s going to get rejected. When you set up a business, whether it’s an LLC or a corporation within the state lines, you need to do a business entity search to make sure that no one else is using that name because it will be rejected. The good thing with that also means that when you are set up, it’s going to preclude anyone within the state lines from being able to use that same business name as you as well. Now, this is where I can get on my little side note here to tell you also keep in mind you need to do some trademark searches for the federal trademark through the USPTO Office to ensure that you’re not infringing on someone else’s existing trademark that is federal, which is through all the states.
Let’s stop for a second. LLC creation or corporation formation in a state can preclude people from within that state of using the same business name, but it doesn’t preclude through the United States and just because you get approved in your state with a certain name for your LLC or corporation, does not mean you’re not infringing federally. There are two different search departments that you need to go through, the state one and then the federal trademark as well. Choose a name that’s not taken within your state and also do the federal trademark search to ensure that you’re not infringing upon anybody else.
I actually strongly recommend on the trademark side having an intellectual property attorney, I know of one right here, or there are trademark search companies that are reputable, that I’m happy to give you guys some recommendations on later on, that you can have do these searches for you because they also know what to look for. It’s not as simple as being ABC Photography or ABC Studios. If they are substantially similar or a likelihood of confusion, a couple other things, you guys can be precluded from using it because you may end up infringing. Just keep in mind you may want to consider when you’re doing the trademark search before setting up and investing in the LLC stuff, even if you don’t plan on trademarking your own business name, you want to keep yourself from infringing upon other people’s business name.
To actually get set up, this is point number two, you’re going to file what is called the Articles of Organization. The majority of the states already have these online for you. It really is as simple as filling it out, but there are things that you need to have some legal advisement on. This is where an attorney can come in to play.
The third point is also to get an operating agreement drafted. Even if, I hope you’re listening, even if you are the sole business owner and the only person working within that LLC, you need to get your operating agreement drafted. Okay? This we’re going to talk about a little bit when we move into the corporate veil and to not pierce that and I’m going to explain that here in a little bit.
Then, lastly, once you get your confirmation of your LLC all set up, the name wasn’t taken, you’re not infringing upon anyone else, you filed your Articles of Organization, you get your operating agreement in order, you get back a Certificate of Formation from the state, you want to go and update all your contracts, insurance policies, permits, and your licenses. Okay, so a little crash course on how to set it up, so let’s talk about the top ways to not do what is called piercing the corporate veil.
Like we talked about in episode 31, this is Entities 101 for entrepreneurs, we know that there, within LLC, you get separate bucket liability protection, personal assets are in one bucket, business assets are in another. However, you can do what is called piercing the corporate veil, which is essentially piercing through that, one of those buckets into your personal assets, and allow your personal assets to be touched by doing certain actions. This is extremely important as to why you don’t want to do it yourself business formation or have a CPA do it for you that does not have the proper background or licensure because they’re not able to advise you properly. You don’t just get separate liability bucket protection merely from filing those Articles of Organization. You have to earn it.
The government just doesn’t want to take your money. I mean, of course, they want to take your money, but they want you to earn that liability protection status that you’re receiving. Okay? Here’s the top ways to not pierce the corporate veil because if the corporate veil gets pierced, you can be sued personally, you can have your personal assets touched as well as your business assets, and we don’t want that to happen. Right?
The first thing is always sign any documents for your entity. You can do your name, but make sure it says, like Rachel Brenke for the Brenke Group LLC. Designate that you’re signing for the entity. Make sure all of the legal documents have your entity name whether you are signing as yourself or as the LLC, you want to make sure that LLC is designated on there all the time. They’re going to ask for your personal signature because they want to know who the actual living, breathing human being is that signed it, but ensure that it designates that it’s for that entity name.
Use the regular entity name on legal documents. Some of you may be using DBA’s or fictitious names or pseudonyms, that is okay. For example, I am the Brenke Group LLC and then one of my industry niche blogs is The Law Tog. It is a DBA of the Brenke Group LLC, so the legal entity formation is The Brenke Group LLC. That name is going to go on all my legal documents. I can also put the Brenke Group LLC DBA The Law Tog, but I don’t want to just put The Law Tog on there. I want to designate that it is going to be connected to the Brenke Group LLC.
A really huge one, please listen to this, please have separate bank accounts from your LLC, for your business stuff from your personal stuff. Please have separate bank accounts. Please do not commingle your funds. Please make sure you put all monies from your payment processor into your business account and then pay yourself out of the business account. Everything needs to be clear cut. Treat it like a business because this is a business, even if you are the only entrepreneur that’s working the business. On the same vein, ask all payments be made to the entity and not to you personally. People will try to write things to Rachel Brenke, I want them to write it to the Brenke Group LLC.
Make sure you check your commercial leases and contracts for personal guarantees. I see a lot of commercial leases that person just print off the internet and they will give these to an LLC that’s moving into a commercial space. It has what is called a personal guarantee. It’s essentially saying that I, as a representative of this LLC, since I’m a single member, I am going to personally guarantee that if the LLC fails to pay, that I’m going to be personally liable. That’s not necessarily a negative thing. Sometimes landlords just want a second layer of assurance, but I personally would negotiate to take my personal guarantee out of there and only keep it for the LLC on that commercial lease or contract.
Last, of course, please ensure … of course, this is not all-inclusive guys. This is just a nice little checklist for you. Have separate insurance accounts. Please do not put your business equipment on your personal equipment policy. Not only will it not be covered, but again, you’re starting to blur the lines, blur the buckets. Keep separate insurance accounts and policies for your business entity separate from personal. Anything that you can separate, separate as much as possible. You have to work to have a separate liability bucket protection.
Hope that helps you guys. A little crash course on how to set up the LLC and then some of the top ways to not pierce the corporate veil. If you have any questions, please head over to the Business Bites Facebook group. I’d be more than happy to discuss this a little bit more.
Thanks for joining Rachel on this episode of The Business Bites. For show notes, a list of recommended tools, or a referenced episode, you can find them at BusinessBitesPodcast.com. Until next time.
How to set up LLC
Choose a name that isn’t taken or trademarked
File articles of organization
Get an operating agreement
Update all contracts, insurance policies, permits, licenses
Top ways to not pierce the corporate veil
Always sign for your entity
Use regular entity name on legal documents
Separate business accounts
Ask all payments be made to the entity and not to you personally
Check commercial leases/contracts for personal guarantees
Rachel Brenke is a lawyer, author and business consultant. She is currently helping professionals all over the world initiate, strategize and implement strategic business and marketing plans through various mediums of consulting resources and legal direction.