6 Mistakes that Can Destroy Your LLC Protection

Everyone says to create an LLC, but filing the paperwork is just the first step. If you don't maintain it properly, you could completely destroy the legal wall your LLC created between you and your business (and that wall is the only thing protecting your personal money from business lawsuits). Tune in for 6 common mistakes business owners make that risk their LLC liability protection.

Key Takeaways

• Your LLC creates a legal wall between your personal money and the risks of doing business, but there are a few things that a lot of business owners do without realizing that can destroy that legal wall.
• Forming your LLC is just the first step. If you don't know how to use it, your LLC won't actually protect you.
• Always sign your contracts on behalf of your LLC, not personally. You are not the service provider or the client, your LLC is.
• Keep your business and personal money separate. Co-minging funds is the fastest way to get rid of your LLC protection.

Resources Mentioned

• Join Cover Your Assets
• Watch the free masterclass
• Follow Amy on Instagram @artfulcontracts

Next Steps

Thank you so much for listening! If you enjoyed this episode, please reach out and let me know by sending me a DM on Instagram @artfulcontracts

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Episode Transcript

Your LLC only protects you if you know how to use it. Like most things in life, it's not gonna work if you don't use it in the right way. And I think a lot of business owners will just file the forms. Their LLC exists and they think they're good, but there's actually more to it than that. So this episode we're gonna cover six mistakes that business owners make that can actually destroy the legal protection provided by an LLC, and you might as well not have one.

Hey, I'm Amy Nessheim, licensed attorney for online business owners and founder of my own business, Artful Contracts. You're listening to Legal Made Easy, the show that makes the legal aspects of online business easy to understand and implement so you can grow your business with confidence knowing you've got it all covered. Let's dive in.

The whole point of having an LLC is to separate your personal assets from your business assets. If you need a refresher on business entities and why you need an LLC, go back to episode nine. There's a good breakdown there of that. But just as a reminder, the reason you have an LLC is to protect your personal assets from the risks of doing business. But there are some things that you can do, or if you don't, some things that if you don't do them, then your LLC protection, that separation between your personal assets and your business assets, can totally go away. It can be destroyed. A court can say, nope, your LLC doesn't exist because you didn't treat it like an LLC. And then what's the point of that, right?

So if you want an LLC, if you decided to form an LLC, then you also have to maintain it. You also have to take the steps to make sure that that protection stays in place. So here are six things that I see business owners do quite frequently that actually risk that LLC protection. Now there's kind of three categories that these fall into.

The first one being a court can decide that the LLC doesn't exist. You've destroyed that legal wall in between you and your LLC. Another one is just not using it. You have the LLC, but you don't use it. And so there are some mistakes that that you're just kind of bypassing your LLC, so you're not taking advantage of it. And then the third one is mistakes that can actually just make your LLC disappear. Like not maintaining it in the right way so that it continues to exist, it goes away. And a court doesn't decide that. You're just it's neglect basically, and then it's gone. So that's kind of the three ways that this can happen. And I'll break that down in more detail as we go through each of the mistakes. So now let's just dive into that.

The first mistake is falls into that category of just not using your LLC, and this applies to business owners who had a business before they formed the LLC. So if you started from day one with an LLC, you don't have to worry about this. But if you started your business, took on some clients, and then transitioned to an LLC, listen up. A lot of business owners don't transition their clients from working with them individually to working with them as their LLC.

If you got a client on day one of your business before you had an LLC, chances are your contract has your name on it, right? Not your LLC name. So after you form your LLC, you have to transition that client over to working with your LLC. It doesn't happen automatically. It's something that you have to affirmatively do. You have to enter a new contract with that client. Otherwise, they're just working with you personally. And so the LLC is irrelevant to that relationship. And if something ever goes wrong in that relationship, then your personal assets are at risk and your LLC just doesn't apply. And that's a really easy fix. You just have to ask your client to sign a new contract with your LLC as a party to the contract instead of you individually.

Now that brings me to the next mistake that is probably the most common, and that's entering your contracts personally instead of on behalf of the LLC. If you have an LLC but your contracts don't mention your LLC, then it's useless to you, right? It's another situation of just not using it. So what you need to do is make sure that your LLC is listed as the party to the contract. So if you are the service provider, the LLC is the service provider, you are not the service provider with your personal name. The LLC name has to be listed as the service provider, and then in the signature section, you list the LLC name and then you sign your regular legal name, but after it, you have to put duly authorized or member or something that indicates that you are signing in your capacity as owner, manager, president, whatever, on behalf of the LLC. You're not signing in your own on your own behalf, you're signing as the LLC.

And same goes if you're the client. If you're working with a service provider and they send you a contract, don't just glaze over it. You'll have to send it back to them and say, actually, I have an LLC. And I do I have to do this like with all my service providers because they just automatically put my name on it. But I'm not the one entering that contract, I'm not the one paying them. My LLC is paying them. So I need to send it back and say, no, I actually need my LLC on here, and they're always fine with it. So you just have to make sure that the client is not you personally, it's your LLC.

Now some CRMs make this a little bit challenging, like Dubsado, for example, does does not make it easy to sign as the LLC, but you can ask your service writers or you can build into your contracts a place where you list the name of your LLC first and then the signature is underneath it. So it just makes it clear that it's the LLC that's entering the contract. And again, the reason for this is that if something goes wrong in that relationship, the person that's on the hook, the entity that's on the hook, is what's listed in the contract.

So if you're listed in the contract personally, then you're on the hook, not your LLC. And you want to make sure that your personal assets are safe. Again, the whole reason that you form the LLC, so you want to make sure the LLC is the thing that's listed in the contract.

Alright, the third mistake is mixing up your personal and business money. And this is probably the second most common mistake. Everybody does it at some point in their business, I think. Because it's kind of hard to wrap your head around, right? You have to think of yourself and your LLC as two separate people who own things separately, who enter contracts separately. You're not the same person. So if you're used to thinking of yourself as your business and you're used to having everything mixed together, this can be a little bit challenging, but it's definitely worth the effort.

And here's the reason: if you ever get involved in a lawsuit, the court will look at how you behave with your LLC. And the first thing they're gonna look at is do you treat your LLC as separate from yourself? And the main indicator for that is do you have separate business bank accounts? Do you pay for business expenses with your personal cards? Do you pay for personal expenses with your business cards? If you're doing that, you're not treating your LLC as separate from yourself, and the court can decide that that legal wall doesn't exist. It can decide that your LLC doesn't exist, and it's called piercing the corporate veil. And the court can reach through the wall around your LLC into your savings accounts and into your personal money, your house, all of that.

So the whole again, the whole reason that we have the LLC is to protect our personal money. So if you mix it together, that defeats that purpose. So what you need to do is make sure that you have separate business bank accounts owned by your LLC. And yeah, that means that if you had a business before and you had business bank accounts under your own name, you're gonna have to open up new ones under the name of the LLC because the LLC has to own those accounts. You also have to make sure that your Stripe and your PayPal, the deposits are going into that account and not into your personal account or not into the old business account that's owned by you. And all of your expenses, especially those recurring expenses that you forget about, make sure they're not still on your personal card, make sure they're not still auto-deducting from your personal debit account. You've got to switch it all over, and that might be a task. It's gonna take a little bit, but go through your statements, find it all, and make sure it's all going in and out of your business account or business credit card.

The next mistake is not keeping up with your bookkeeping. And this is important for the same reason we just talked about because messing with the money is the number one way to get your liability protection taken away. And if you ever have a mistake, if you ever, or if you ever just decide to pay for an expense on your personal card and then reimburse yourself, the way that you manage that is with your bookkeeping.

If you are really good with your bookkeeping, you can show that nope, I just paid this expense and reimbursed it. And if you file a an expense report with your LLC, with your bookkeeper, even if your bookkeeper is you, file an expense report with yourself, attach it to your bookkeeping software, and then give yourself the reimbursement for that amount. And if you're doing it in a methodical, systematic way, that's how you manage and it's not commingling, it's expense reimbursement, right? So honestly, the first hire that I recommend for small business owners is a bookkeeper. Unless you are good at it, you know what you're doing, or you enjoy it, hire it out because it is really important for the health of your business, for maintaining that liability protection, and just making sure that you know where your money's going and where it's coming in. This is like the first thing that I hired because I hated maintaining my books, but I knew how important it was, so I handed it off as fast as I could.

All right, the next mistake is forming your LLC in a state where you don't live and then not registering as a foreign LLC in the state where you do live. There is a lot of advice floating around on the internet that says form your LLC in Delaware or form your LLC in Wyoming or you know the different places that have tax advantages or supposed better LLC protections or something like that.

First of all, that advice, most likely, if you're listening to me, if you're part of my audience, that advice does not apply to you. That advice is not not something that you need to pay attention to. And the reason for that is that any differences in the LLC laws are not gonna benefit you if you're just one person or if you're just a couple people having a business together. You don't have the volume, you don't have the number of owners that you would actually be benefited by those differences in the LLC laws.

And then the tax advantages, the quote unquote tax advantages also aren't gonna apply to you because even if, okay, Delaware doesn't have business tax, you're still doing business out of the state where you live. You still have to pay the taxes in your own state. Forming in another state doesn't avoid that. So again, that might be a benefit for a really big company that's formed as an LLC, but it's not gonna benefit you unless you have like multiple offices, employees in lots of different states, and you need a home base that's gonna be at beneficial. Your home base is where you live. If you're a solopreneur online service provider, your home base is where you live and you're gonna be subject to the taxes where you live anyway. So just form where you live because that won't help you.

And the other reason for that is because if you form somewhere that you don't live, you have to file as a foreign LLC in your jurisdiction too, in the state where you live, also. So you're actually submit you're actually subjecting yourself to double fees. So you have to pay the filing fees to register in whatever state it is, Delaware, Wyoming. And then you'll also have to register as a foreign LLC in your state and pay the filing fee to register as a foreign LLC in your state. So you're paying double fees. And most people don't even know that, so they don't file as a foreign LLC in their state, and that's what this mistake is. If you're filed in another state and you don't file in your own state, you can actually cause a big mess for yourself with fines, penalties, back taxes, and even in some states, it's a misdemeanor, as like you personally can be responsible. And again, if you personally are responsible for anything, you're not using your LLC, right? There's no point in having it.

But you personally can be responsible for for operating a business in a state where you're not authorized to operate it. And some places it's a misdemeanor, some places it's a fine. So don't do that. If you filed in a state that's different from where you live right now, go check and make sure you're filed as a foreign LLC in the state where you live. Now I'm using the state where you live, just side note, I'm using that as a shortcut for your main office. If your main office, if the main place where you operate business is different than where you live, use your main office state.

All right, mistake number six is not filing your annual reports. For your LLC to exist, you have to file the initial formation with the state, but then every single year after that, you have to file a report and pay a fee so that your LLC continues to exist. In some states, it's a certain day of the year, everyone has to file their annual reports. In some states, you just have to file it on the same day every year as the day that you filed. So you file it and then a year later file an annual report. Depends on your state. So put this, go look it up, put it in your calendar right now. It's a really easy thing to forget. And I have forgotten before, and you just have to pay a late fee. It's not a big deal until it's a big deal. It's one of those things.

So you have, generally speaking, you have a year to catch up if you're behind. You'll have to pay a late fee. But so you get in bad standing, you're not in good standing, and you pay the late fee, and you file your report, and you can get back in good standing. But if you miss it for more than a year, your LLC can actually be what's called administratively dissolved. The state can, because you didn't keep up with it, decide it doesn't exist anymore. So go check, make sure you filed your annual reports and put it in your calendar for the next time it's due. Because it's only once a year, it's easy to forget. But it's also super important to make sure your LLC continues to exist.

All right, that was these six mistakes that can destroy your LLC protection that are super common most business owners make. As a quick recap, that was not switching clients over to work with your LLC, making sure your old clients are on contracts with your new LLC. The second one is entering contracts personally instead of as your LLC. Make sure you're always signing on behalf of your LLC. Third is mixing up your personal and business money, not maintaining that separation in your finances.

Next is not keeping up with your bookkeeping because those two go hand in hand. If your bookkeeping is a mess, then who knows if your LLC exists. Next is forming your LLC in a different state than where you have your main office and not registering in the state where you have your main office. And if you work from home, your main office is your house.

And last, not filing your annual reports. Go check that date, put it in your calendar. And if it says not in good standing, just file it now, pay the late fee. If this episode has made you realize that you have your LLC but you aren't quite sure what to do with it, I would love if you would head over to artfulcontracts.com/live class and catch up on the free training that I did this week.

If you are listening to this the morning it comes out, you haven't missed it yet. It's today and tomorrow, Tuesday and Wednesday, uh, October 18th and 19th. If you head over to that link, you'll be able to catch the class live. If you're listening to this after the 19th, you'll still be able to catch the replay until October 26th. And at the end of that class, I introduce my signature program, Cover Your Assets.

Enrollment is open with some extra bonuses and a discount until October 26th. Cover Your Assets is my signature program that provides the step-by-step method to get your business legally legit to get all of your legal stuff covered in the most simple way possible. If you're ready to get the legal stuff taken care of, I would love to see you inside.

So head on over to artfulcontracts.com/live class to sign up for the live class that's happening on the October 18th and 19th, or to catch the replay that's going to be up until October 26th. And that will unlock your invitation and your discount to join Cove Your Assets. If you have any questions while you're watching the training or about Cove Your Assets, feel free to DM me on Instagram. I would be happy to answer whatever questions you have. All right, that's it for this week. I'll see you next time.