Town of Falmouth Residential Customers

Commercial Customers, this one’s for you! Check out our monthly guest post from our friends at SCORE Cape Cod.

Does An LLC Really Protect You? Here’s 5 Ways to Make Sure It Will.

We tend to assume that because we have an LLC our personal liabilities are limited. Well, that’s not necessarily true. Setting up an LLC is an important first step but you need to do more to put yourself and your business in a strong position.

Start by recognizing that your business is an entity.  It’s separate from you and your personal accounts. With that as the foundation, here are five ways to protect your personal liability:

  1. Make sure you renew your LLC annually—it’s not just a one-time occurrence. If you don’t renew your LLC every year, the state will dissolve your company. This is one of those things that we all easily forget so set a reminder in your calendar and give yourself enough time to meet your deadline.
  2. Develop an operating agreement–a contract that lays out how the owners will run the business, who makes what decisions, what do you have to vote on and all other pertinent issues. We (and many banks) believe an operating agreement elevates your business, demonstrating that you’re serious about the business and making decisions on a pre-determined strategy. Often, business partners are friends or relatives who don’t feel they need this agreement because of their relationship. Right? Wrong! The closer you are, the more likely you are to have difficulty making tough decisions. Think of the operating agreement as a pre-nup. It keeps it clean and you’ll remain friends.
  3. Do not commingle funds. Always maintain separate bank accounts for your business and personal assets. Do this on Day One—not when you feel you have enough cash to actually set up a business account. If you mingle your personal and business funds, you are setting yourself up to be sued. If you put your assets together, your liabilities will be together as well. Case in point: you have extra business cash one month and pay personal expenses from the business account. Once you start to commingle those funds a court can come after you as a personal debtor. You have lost the liability protection of the LLC.
  4. Own business assets in your business name, especially your intellectual property. This is particularly important if you have trademarks and patents. Register, and treat, them as a business asset. You may be thinking that long-term you want to own the trademark for another reason; however, right now your goal is protection. If an individual or a company feels you are infringing on their trademarks (or they on yours) you don’t want litigation to target you versus the business. Protect your personal assets from any litigation.
  5. Like your assets, put your liabilities in your business name. This means that anytime you sign a contract, send out an invoice or communication you do it in the name of the business. Always sign with your title and company name. If a contract or invoice is directed at you personally, send it back and have it reissued in the company name, with you as an officer. All commitments need to be in the name of the company, not you the individual.

Keeping your business totally separate is the key.  Any questions about how you can keep your business separate, contact SCORE for free, confidential mentoring at 508-775-4884 or capecodscore@verizon.net or capecod.score.org