After you have received a Certificate of Organization from the Secretary of State and a Federal EIN from the IRS, you must properly maintain your limited liability company (LLC). Failure to maintain an LLC correctly may result in you being personally liable for the actions and debts of the LLC. Thus, you would not be able to utilize the asset protection abilities of the LLC.
Record Keeping and Piercing the Corporate Veil
Strong record keeping is essential when it comes to receipts for expenses, deductions, and business assets (what you bought, what you paid, and its depreciation). Also, you need to make sure that you do not commingle funds by using business income to pay for personal items or vice versa.
Failure to maintain accurate and separate accounting can result in a creditor being able to “pierce the corporate veil.” This means that the layer of protection provided by your LLC will no longer be adequate to protect your personal assets.
Best Practices for Maintaining Your LLC
Typically, personal liability is limited to what the individual personally invested; however, that liability protection can be set aside under the alter ego doctrine, where the court holds individual members personally liable for the business’s debts.
In order to avoid these risks and maintain your liability protection, it is best to:
- File a separate tax return when necessary
- Sign documents in the name of the LLC
- Keep detailed financial records
- Comply with all annual filing requirements
- Adequately fund the LLC
- Keep separate bank accounts
There is a common misconception that when you form an LLC your personal liability will always be protected, but this is not automatically true. To achieve full protection, your LLC must be properly maintained.
We always advise that you seek the assistance of a business attorney when it comes to properly maintaining your business. If you would like to discuss how to properly maintain your LLC, please contact Kapadia Naik & Farhoudi or call us at 770-881-8081.