How to Make Sure Your LLC Provides the Legal Protection You Need
Forming an LLC is a smart move for many freelancers and small business owners, because it provides you with more legal protections than you enjoy as a sole proprietor. But you may need to take a few additional steps after forming your entity to make sure it can fully protect you should you actually get sued or face litigation.
Are You and Your LLC the Same Thing?
In order to receive the full legal protections of an LLC, you need to clearly distinguish it from yourself. Should you ever face litigation, you'll need to prove that you and the LLC are two separate entities.
If you can't make a reasonable case for why you as a person (and your personal assets) should be considered completely and entirely separate from your business, then you may not receive the full legal protections offered to a limited liability company.
Here are some ways you can make a clear separation and an obvious divide between you, the person and individual, and your company, the LLC and independent entity:
Put an Operating Agreement in Place
If you've already filed as a limited liability company, the next thing to do is set up an operating agreement — even if you're the only person in the business.
An operating agreement describes the operations of your business and usually establishes the formal agreements between each of the owners. You should include:
- A description of the business
- How the business operates
- A succession plan, or instructions for who takes over if you are unable to run the business
Document Operations and Processes
In addition to your operating agreement, you should consider documenting all your processes and details about each role required to run the company (even if you currently fill all the roles yourself). Again, this provides further proof that your LLC is truly separate and independent of you as a person.
Set a goal to create an operations manual, or a document that details how to perform the critical functions your business must manage in order to operate successfully. If these processes only exist in your mind, it's harder to argue that you and the LLC are two separate entities.
Keep Separate Books and Financial Accounts
If you haven't set up a separate checking and saving account for your business, do it now! You should keep your personal and business finances separate — all the way down to budgets and record-keeping — which are critically important, because you need to track every penny in your business!
These need to be in completely independent systems. Again, the point is to be able to prove your LLC and you, an individual, are not the same thing.
If you already keep separate bank accounts for you and your business, you may still need to make some updates. You may need to change the information on the bank accounts so they are listed in name of the LLC, for example, not under your name. The same goes for the address and other specific details — these should reflect where the LLC is registered, its tax ID number, and so on.
Sign Documents on Behalf of Your LLC
When you go to sign other contracts or agreements, you don't want to sign with your name — you want to sign on behalf of the LLC.
You might also want to update all your invoices to show they're coming from the LLC. Require that any payments received be made out to the LLC instead of made out to your name.
By taking these steps, you'll begin to define you and your LLC as two separate legal entities — but further actions may be required.
If you're concerned about getting the full legal protections you should be entitled to as an LLC, it would be smart to talk to a business attorney who can advise you on additional actions based on your specific situation and location.