One of the main reasons that business owners form limited liability companies (LLCs) is to protect their personal assets from any business claims. That protection is referred to as a liability shield.
However, if the proper steps are not taken to protect the liability shield of an LLC, a court may “pierce the veil” of the LLC and hold members personally liable for any claims. Here are steps that LLC managers and members can take to protect their LLC liability shield:
Keep Finances Separate - To keep the LLC legally separate, all financial accounts for the LLC should be separate and apart from those of the individual members.
Keep the LLC Capitalized - Some courts may pierce the veil if the LLC lacks adequate capitalization.
Use the LLC - Members should expressly refer to the LLC in all dealings with third parties so it is understood they are dealing with the LLC, not with the LLC’s members in their individual capacities.
Do Not Abuse the LLC - The courts may pierce a LLC’s veil if members or managers use it to commit fraud or other serious misconduct.
Remember that LLCs are only valid in one state at a time. Using a great LLC from a permissive or privacy protected state is NOT legal in other states; unless you ALSO register them in each of the other (foreign) states. That may defeat most purposes of the good state laws. In fact, failure to register the (foreign) LLC is probably a crime; both as failure to register, and perhaps also considered tax evasion.
Corporations and LLCs have annual registration and renewal requirements. They may also have a base tax imposed. They may cost much more and be inappropriate to own passive assets like real estate, investments, or internet businesses, just to name a few.
Submit annual reports - Keep disclosures accurate. Maintain changes and minutes in records. Act like a business. Submit tax returns and pay taxes.
Follow the Laws - Follow the Rules. Although LLCs do not have the same formal requirements as corporations, there are some rules that must be followed to remain and protect LLC status.
Also, consider a Private Asset Trust and compare benefits, protection, legality, costs, and privacy.