- Hi everyone, I'm attorney Aiden Durham with 180 Law Co. in Denver, Colorado. And you're watching
All Up In Yo' Business. (upbeat guitar music) In this episode of All Up In Yo' Business, I'm gonna talk about some of
the really common mistakes that single-member LLCs
make, and ways to avoid them in order to protect
your personal liability. But before we get into it, please be sure to like,
subscribe and share and check the description for some additional
information and resources too. All right, so single-member LLCs. Before we get into the
big-time mistakes and risks with single-member LLCs,
a little background. So what is an LLC? An LLC is a limited liability company. That's what LLC stands for. The owners of the LLC are called members. Therefore, a single-member LLC is a limited liability company that only has one member or one owner. The purpose behind an LLC, the general reason that we use
LLCs to operate businesses, is for limited liability protection. That L-L in LLC is limited liability. And what that means is that the liability is limited to just the business, rather than it being the liability of the members or the owners themselves. So by creating an LLC, the single member has in
essence created this new being, this new legally recognized being separate from him or herself. Separate from the owner. And the idea is that any
liabilities, any debts, any lawsuits, any legal issues
that come up with the LLC, are the legal issues of the LLC itself and not the individual member. So if there is a lawsuit
or some kind of issue and the LLC has to pay damages,
let's say a million bucks, it's the LLCs assets, generally speaking, that are gonna be subject
to that liability, versus the members'
individual personal assets, like their home or their
personal checking accounts or personal investments. The idea is that those assets, the personal assets of the member, will be protected from
liability of the LLC. Now I say that's the purpose
and that's the idea behind it because that's what we're aiming for. But it doesn't always work out perfectly. There are instances where a member of a limited liability company can be personally responsible, can be held personally liable for the liabilities or
the debts of the LLC. And this term generally is referred to as piercing
the corporate veil. You want to imagine there's
a veil of protection, a protective cloak if you will, a nice, warm, comfy blanket
that the LLC gives you. And it's this nice protective veil. But if you do things wrong or
if you make a few mistakes, a court might decide to pierce that veil and rip away your warm, comfy blanket. And now you are fully exposed and you personally are
liable and responsible for the debts of your LLC and the liabilities and all
the obligations of that LLC. So even though the goal
and the idea is to keep that protective limited
liability blanky around you, that's the goal, but sometimes
it doesn't work out that way. And that risk of piercing
the corporate veil is much higher in a single-member LLC as it is compared to a multi-member LLC, where there are multiple owners. Because it's just one member, one owner, there isn't that checks and balances that you would have otherwise
with multiple members. There aren't other varying opinions. There aren't other people that you have to check
with or okay things with. The single member has
pretty much full authority to do whatever she wants with the LLC. And so that, in itself,
makes it a little bit riskier and increases the chances of
piercing the corporate veil because there's less of a separation between the single member and the LLC compared to a multi-member LLC. Now when we talk about
piercing the corporate veil, there are a lot of different
factors and details that go into whether or
not a court will decide to pierce the corporate veil. Now in Colorado, our law regarding this is it's not necessarily going
to be the same in every state. Every state, every jurisdiction, their laws with regard to
under what circumstances we will pierce the corporate veil, those are gonna be a little different. But I'll tell you in Colorado at least, from our most recent
court decisions and stuff, the bulk of piercing the corporate veil comes down to this alter ego doctrine. Essentially the question is, is this LLC merely an
alter ego of its owner, rather than being an
actual separate entity? And there are eight factors that are gonna go into
this alter ego question, or eight factors that the
court's going to consider in determining if the
alter ego does apply. The first factor is
whether the LLC operates as a distinct business entity. The second is whether
funds are co-mingled. The third is whether adequate corporate records are maintained. The fourth factor is
whether the nature and form of the entity's ownership
facilitate mixed use by the owner. Number five, whether the
business is thinly capitalized. Number six, whether the entity
was used as a mere shell. Number seven, whether shareholders disregarded legal formalities. And number eight, whether
funds or assets of the business were used for non-business purposes. So those are the eight
factors that a Colorado court will look at when considering
if an alter ego exists and if they should pierce
the corporate veil. Again, every state, every jurisdiction's gonna
be a little different. As far as I know, the general
idea amongst all the states is typically, it's pretty much the same. It is kind of all based around this idea of alter ego or whether there
is a genuine separateness between the owner and the company. In Colorado as well, the whole
alter ego thing by itself typically isn't enough. There also has to be some
kind of showing of fraud or misconduct or some other
kind of wrongdoing with the LLC. So it's typically not enough just that those alter egos factors apply, but there also has to be
some kind of wrongdoing on the part of the business owner. But again, that all differs
and will be a little different for each jurisdiction and each area. But like I said, generally the
idea is pretty much the same. So what kinds of things can
we do to avoid those risks? And what are some of the mistakes that single-member LLCs typically make that put them at risk? Number one, obviously the
big thing is separateness of assets and funds of the business. So, a big mistake that a lot
of single-member LLCs make is not having a separate
dedicated business account. Business checking account,
business credit card accounts. Every money that comes into
the LLC is the LLCs money and it needs to be held separately from the individual member's money. And so that is probably
number one the biggest mistake that I see is co-mingling assets between the member and the LLC. Whether it is holding all
the assets in one account, personal and business, or if it's using business funds to pay for your personal expenses. So if you're paying your
rent or your cell phone bill or your Netflix subscription bill out of your business account, that's bad. That's co-mingling funds. And that can get you in some hot water. Aside from co-mingling funds
or not keeping assets separate, the second real big mistake that I see a lot of
single-member LLCs making is not following corporate formalities. Or not following these formalities that we should be following. With a single-member LLC, it seems weird to do some of the things
that we should be doing. The best way to go about doing this is to pretend you're
in a multi-member LLC. Or pretend your business is a corporation and do what would be required. (dog barking) And do the things that
you would be required or normally expected to do in a corporation or a multi-member LLC. So when we're talking
corporations versus LLCs, the reason that LLCs are
as popular as they are is because LLCs have a lot of flexibility. Generally, most states
give LLCs a lot of freedom to operate and form how they want to, where corporations have
a lot of requirements. So for most states,
corporations are required to have bylaws or they're
required to have annual meetings or organizational meetings. And they're required to
do these certain things, whereas LLCs are typically
permitted to do those things. So where a corporation
might have to have bylaws, an LLC may have an operating agreement. An operating agreement for an LLC is kinda the internal governing document that talks about how the LLC is operated, what its purpose is, what the rights and
obligations of the members are, how decisions are made and
how votes are calculated. All of that. So it would seem weird
for a single-member LLC to have an operating agreement. 'Cause, I mean, I'm the only one. I'm the only one making decisions. I'm the only person involved. Why would I have to have
an agreement with myself? Well, you don't have to. The states don't require it. But we know from legal history
and legal case precedent, that it's still a really good idea to follow those corporate formalities even if it's not required or even if it seems silly to do so. So in a multi-member LLC, we would have an operating agreement. So you should have an operating agreement for your single-member LLC. A corporation or a multi-member LLC might require annual meetings or might require some
annual meeting minutes. Just because it's just you doesn't mean you shouldn't have minutes
or meetings with yourself. Now, again, it seems pretty silly to have a meeting with yourself. And yeah, it kind of is. But that's essentially
what you wanna do anyway. You know, you don't have
to have an actual meeting. What I typically recommend for my clients is having a consent to action
or some kind of written action in lieu of actual, formal meetings. And if y'all are interested, check the description
because I have linked to a free download of a
sample single-member LLC consent to action for you all to use. 'Cause I've gotten a lot
of questions on this topic of what do our meeting
minutes need to look like. Like how do we document this? And it's really a simple process. So check the description if you wanna download that sample template for a consent to action
for a single-member LLC. Along with following those
corporate formalities, another important thing
to do and another thing, a mistake, that I see happening a lot is under-capitalizing the LLC. In other words, not keeping
enough money in the LLC. There is a thought, if
you think far enough ahead of this limited liability idea of the LLC is the one that's gonna be subject to liabilities. It's gonna be the LLC's assets, the LLC's bank accounts,
the LLC's equipment. All of that is what's subject to it. So in theory, if I keep all
of the money out of the LLC, then I should be safe, right? If 10,000 bucks come in to the LLC, I need to pay that to myself so that there's no money for
the LLC to lose if it is sued. Eh, you can't really do that. You have to keep some adequate
capitalization in your LLC, in your business's account. You can't deplete all
of the assets of the LLC solely for the purpose
of avoiding liability. So what does adequate
capitalization look like? There is no like bright
line or hard rule about it. Generally you wanna
have enough in your LLC to pay your expected overhead, pay any debts or obligations
that you know are coming up. You know, just be a
reasonable business operator and keep enough in your business
to continue operating it. That's really all you need to do. If your business isn't
making a lot of money, that's not going to be
a huge negative effect. Just because you're not making any money, that doesn't mean you're
under-capitalized. There needs to be some kind of a intentional
under-capitalization really. Another big mistake that I see a lot of single-member LLCs make is not properly representing themselves under their capacity
as a member of the LLC. So what do I mean by this? When we are signing contracts or entering into any kind
agreement with somebody, we wanna make sure that it is the LLC that is signing that contract. It's the LLC that's
agreeing to that agreement and not us ourselves. And so how we do that is we need to sign on behalf of the LLC. Because if you are
undertaking an obligation, if you're entering into a contract, and you just sign your name like you would any other contract, you are agreeing to that. You personally are signing that contract. So you personally are
bound by that contract. And we don't want that. We want the LLC to be the
party to that contract. So typically how this would look just on a general kind
of agreement or contract, where the signature line is,
it would have LLC's full name, which that part's important,
including the LLC portion or if you put limited or LLC
or limited liability company at the end of your business name, that part needs to be included in it. So the signature line would
have the business name, by, B-Y, and then the
member's name and the title, which would be member. So I would sign a
contract 180 Law Co., LLC by Aiden Durham, member, or
Aiden Durham, president, owner. The title doesn't particularly matter. But what's important is that it's clear that I am signing in my capacity
as the member of this LLC, and not myself, individually. And then finally, a big mistake that I see from a lot of single-member LLCs is failure to get insurance coverage. The LLC is a really great way of protecting yourself individually and protecting your personal liability. But that doesn't mean that's the only way of protecting your liability. I think even more important than an LLC is just general liability insurance. Now what's the difference? This is a really common question. Like why would I need
insurance if I have an LLC? You gotta, they play two
very different roles. So let's say you have a
general liability policy of $1 million. That's your limit. Your coverage on the policy is $1 million. If your business is sued
and you are found liable, your LLC has to pay $1 million in damages, the insurance coverage is
going to pay out those damages. So nothing actually has to come out of your company's pocket. It's being paid by the insurance coverage, by the insurance. That's what it's there for. Now let's say you're sued for $2 million. Your insurance is only
covering a million of that. So whoever's suing you, they still want that additional million. And that's where they might
try to go after you personally. If, let's say, you've got a big house or you are in a position where
people think you're rich, they're gonna try to
go after you personally for that additional million. And that's where the LLC comes into play to avoid that from happening. So really when it comes to avoiding risks of the single-member LLC and
protecting your liability, the big idea is that separateness and following those corporate formalities that you otherwise would if
you were in a corporation or a multi-member LLC. That's all for this episode, folks. Drop a comment below and
let me know what you think. And again, don't forget
to check the description for my free downloadable template for a single-member LLC consent to action. Thank you all so much for watching. I'm Aiden Durham, and
I'll see ya next time. (upbeat music)
