Maintaining Your LLC’s “Shield”
Happy New Year!
I hope you had a wonderful safe holiday and that 2022 is off to a great start for you.
This is the time of year when we reevaluate our old goals and create new ones. For business owners, these goals may include increasing revenue, hiring new employees, opening new locations, offering online sales, selling new products or services, etc. The possibilities are endless.
If you’re a member (a.k.a. an owner) of a Limited Liability Company (LLC), one thing that should definitely be on your goal list is reviewing the requirements to maintain the liability protections that an LLC provides. That’s the reason we form LLCs, right – to separate our businesses from ourselves. If someone sues the business, this separation protects a member’s assets (their home, real estate, personal bank accounts, investments, etc.)
Simply put, an LLC is a shield wielded in the course of doing business – it protects the owner(s) against certain risks associated with owning a business. In legal terms, this shield is called the “corporate veil.”
To maintain this shield, there are certain formal requirements that must be followed. For example:
(1) Doing business in the name of the LLC – when you are selling products (e.g., food, clothes, candles, equipment) or providing services (e.g., massage therapy, tax preparation, beauty services) to someone, it must be clear that it is actually your business that is selling the products and providing the services as opposed to you as an individual.
Naming the business instead yourself in a contract is a prime example of conducting business in the name of the company. Additional examples include making financial transactions using the company’s bank account and using the business name or logo on letterhead, on websites, and social media.
(2) Keeping Personal and Business Funds Separate – If you own an LLC, the LLC should have its own bank account, which is separate from your personal bank account. Money owed to the business should be paid to the business and into its bank account rather than a personal bank account. Business funds should also not be used to pay for personal expenses. Of course, members and employees are entitled to salaries, reimbursements, etc., but it must be done properly.
Failure to comply with the formalities required of LLCs can lead to what’s called “piercing the corporate veil.” This is what it is called when a court decides to ignore that your business and its assets are separate from you and your assets.
Basically, you lose your shield and can be held personally liable for debts or judgments against the business.
In order to pierce the corporate veil in Mississippi, the courts must apply a 3-prong test and find:
(1) some frustration of contractual expectations;
(2) flagrant disregard of LLC formalities by the LLC members; and
(3) fraud or malfeasance by the LLC member.
Restaurant of Hattiesburg, LLC v. Hotel & Restaurant Supply, Inc., 84 So.3d 32 (Miss App. 2012).
As such, it is important that LLCs follow the formalities required to maintain the limited liability function of the LLC. Forming an LLC is a big step towards protecting personal assets, but there is more involved than merely creating the company.
Mississippi LLC owners should take care to learn what formalities are required to maintain the LLC shield. Protecting your personal assets from potential liability is an important part of preserving the legacy you intend to gift or pass on to your loved ones.
If you need legal advice concerning your LLC or other business entity, please feel free to contact this office.