Two Big Mistakes Small Business Owners Make
The advantage of a small business forming an LLC is that it creates a protection barrier between the small business owner and the business. If the business is sued and the LLC has been properly maintained, then the business owner’s personal assets will be protected from the lawsuit. The lawsuit will only be able to claim damages against the assets in the LLC, and not the owner’s bank accounts, properties, cars, etc. Also, if the business owner gets sued (say, because of a car wreck which injured someone) then only the business owner’s personal assets are subject to the lawsuit, and the business assets in the LLC are protected.
Creating and properly maintaining an LLC creates walls of protection around the business and the business owner. However, a lot of small business owners forget the “properly maintaining” part. After forming an LLC for a small business client I like to take the time to explain that the business owner is still responsible for maintaining the LLC, otherwise everything that I have done in creating the LLC for protection will be for nothing.
Once an LLC is created, and the business owner opens a separate bank account for the LLC (separate from their personal account) and start operating, it’s important to keep those accounts separate.
The first big mistake a small business owner makes which will cost them the LLC protection is what’s called Commingling of Funds.
Commingling of Funds means the owner’s personal bank account and the LLC business bank account have been so intertwined that they are inseparable. The funds have been shifted back and forth between the two accounts that there is really no difference between the two. If this happens, then the lawsuit will be able to go after both the business assets and the personal assets of the owner. It’s key then to not commingle funds.
One way to look at this is to view your company as Walmart or Target. The LLC bank account belongs to Walmart and your personal account belongs to you. Walmart wouldn’t commingle money with your personal account. Even though you are making all the decisions, you have to treat your business like a formal big business. Otherwise the court will hold that you and your LLC have merged identities and therefore all your protections are gone.
The second big mistake small business owners make is signing their own name. When you sign a business contract…whether it’s renting office space, buying property, a purchase order agreement with your product supplier…it’s important that you sign in your capacity as an officer or member of the LLC, not in your individual capacity. The best way to do this is make the signature block at the end of all your contracts state: “John Smith, President of ABC, LLC”. Or “Jane Doe, Member of Avocado, LLC”.
By stating you role after your name, you are showing the other party that you are signing your name in your capacity as President or Member of the LLC, not you personally. This means you won’t be personally liable for the contract, the purchase, or the agreement. Make sure the listed parties at the beginning of the contract state the company is the party, not you. This protects you from being held personal responsible and it keeps you and your company legally separate.
Keeping your identity separate is extremely important for small business. Get into the practice of it now. If you wait until after you’ve been sued, it’s too late.
Blaise Regan is a Partner at Regan & Frisbie, PLLC, a law firm focusing on Wills, Trusts, Probate, Contracts, Business Formations (LLC, Corporation, S-Corp Designation), Business Disputes, DTPA claims, and Consumer Litigation.
Regan & Frisbie, PLLC is located at 7160 Preston Road, Suite 100, Plano, Texas 75024.
Comments or questions, feel free to email him at Blaise@RFPlawfirm.com or call him at 469.200.4737.