For Keeping Your Company's Limited Liability Status

Job site accidents, business deals gone bad, slip-and-falls. Business liability can come from a frightening range of events. Fortunately, there are many tools to help business owners protect their personal assets from business risk. One tool that should be a basic element of any business plan is using a limited liability business entity. 

Business Structures

Business owners have the ability to choose the structure their company will operate in. Business structures include sole proprietorships, general partnerships, LLCs, Corporations, and more. These structures can be divided into two groups: personal businesses and business entities.

Personal business structures involve one or more people doing business as themselves, whether under their own name or an assumed name. Examples include sole proprietorships and general partnerships. In this situation, the business and its owners operate as one, meaning that the owners’ personal assets can be exposed to the business’s liabilities.

By contrast, a business entity is a separate structure from its owners. It will have its own name, its own assets, and its own debts. When properly formed and maintained, these entities can serve as a shield between business liabilities and your personal assets. The most common types of business entities are corporations and Limited Liability Companies (LLCs).

Five Steps That Can Help Maintain Limited Liability

If you are doing business or plan to do business using a business entity, there are steps that you should take to ensure that your company’s liability barrier is as strong as possible.

First, be sure that the company’s registration is current with your state’s registering agency. Most states require business entities to file annual business renewals to keep the business registration active. These renewals are generally quick, easy, and either free or low-cost to file,so there’s no excuse for losing your liability shield due to non-renewal.

Second, be sure that your business’s finances are kept separate from your own. Every business entity should have its own tax ID number (EIN), and that number should be used for all of the company’s financial transactions, including banking. The business should have its own bank account, and all business income and expenses should flow through that account. You must not deposit business funds into your personal account or pay business debts out of your personal accounts. Likewise, do not pay for personal expenses out of the company’s accounts. By not keeping your finances separate when the business is operating, you run the risk of a court determining that those funds should not be separated when it’s time to pay a business debt. Instead, if you need to infuse some cash into the company, you should do so by transferring those funds from your personal accounts to the business’s account, and then paying the expenses out of the business account. Likewise, if you wish to distribute funds from the company to its owner(s), you should do so by transferring from the company’s account to the owner’s personal account, then having the owner use those funds from his or her account.

Third, business entities must use registered business names only. When you create your company, you register your business’s name (e.g., Sue’s Garden Supplies, LLC). If you wish to use another name or any variation of that name (including “Sue’s Garden Supplies” without the LLC tag), you need to register that name or variation with your state agency as an assumed name or d/b/a. Failure to do so can lead to being treated as a sole proprietor or general partnership for all transactions conducted under the unregistered name.

Fourth, each state has requirements for records that must be kept by businesses registered in that state. For corporations, these requirements tend to be fairly detailed and include copies of the business’s formation documents (articles, bylaws, etc.), meeting minutes, corporate resolutions, stock ledgers, financial statements, and more. LLC laws vary greatly from state to state, but generally require at least the business’s formation documents to be kept on file.Some states allow business entities to modify record-keeping requirements in the company’s bylaws or operating agreement, so be sure to check your state’s laws for specific requirements.

Fifth, be sure to use written agreements and invoices on all jobs and sales. These documents should make it clear that the customer is dealing with your business, rather than you personally and gives you the opportunity to add other liability limitations through your terms and conditions. 

Yes, You Still Need Insurance

One question that I get asked frequently is whether a limited liability entity needs to have insurance. The answer is an absolute “YES.” Your business entity status should be your last line of defense against liability; a commercial general liability (CGL) or other insurance policy should be your fist. In addition to covering your business for most types of liabilities that may be incurred, most policies include provisions requiring your insurer to defend the business against claims. By providing a defense, the insurer can save your company money by preventing claims from becoming liabilities in the first place.

Get to (Paper) Work

With a new season starting, now is a great time to review your business structure and practices to ensure that you’re maximizing your personal liability protection. Take a moment to get familiar with your state’s business entity requirements and make sure that your business is up to speed. If you need assistance, contact a business attorney licensed in your state who can advise you on the laws and regulations that affect your business.

This article provides general information on business matters and should not be relied upon as legal advice. An attorney licensed in your state must analyze all relevant facts and apply them to your state’s law to any matter before legal advice can be given. If you would like more information regarding business law, collections, or other legal matters, please contact Zlimen & McGuiness, PLLC at 651-331-6500 or [email protected].

Reprinted with permission from AmericanHort. Connect November 2015.

Bryan Zlimen

Zlimen & McGuiness, PLLC

Bryan Zlimen is one of the founding partners of Zlimen & McGuiness, PLLC. His law practice focuses on assisting Green Industry businesses and their owners.