Congratulations! You have either established a Limited Liability Company (“LLC”) for your business – or are looking to do so. LLCs have become the new norm for many small businesses mainly because of the flexibility in organization and their much coveted liability protection. However, due to either lack of legal advice (or just bad advice) many LLCs are established without an operating agreement – more importantly a well drafted one with asset protection in mind. Perhaps you tried to do it yourself (“DIY”), or maybe your attorney does not generally “do” LLCs. (Note: your operating agreement should not be a short generic form – these will most always lack very important asset protection provisions) Regardless, you should not simply pass over the importance of an operating agreement. Much like a home with a broken window, an LLC without a properly drafted operating agreement leaves the owner with little or no protection from the “elements.”
What makes an LLC a good one for asset protection purposes? There are too many points to make here, but these are some very basic “must-haves”:
- Manager- Managed: The default management of a Michigan LLC (and most other states) is “member-managed.” Structuring an LLC to separate the owner from the management can provide an added layer of protection. Though a member can also be a manger, the ability for the member to appoint a non-member manager creates a formal separation. (Note: it is important to outline the role of the manger(s) to establish this separation; having a successor manager is also a great tool for purposes of ensuring the business continues to run smoothly in the event of incapacity or death.)
- Flexibility in Operation: An operating agreement should be drafted in such a way as to create flexibility for purposes of its operation. This allows for the manager to manage and not worry about adhering to unnecessary requirements set forth in the operating agreement. (Note: it is crucial to only include those provisions that are necessary – anything else that is not adhered to will be subject to attack by creditors and other “predators”)
- Formality Adherence: There should be “separateness” of the owner from the LLC in such things as financial accounts (savings, checking, credit, etc.) – both in the operating agreement and in practice. Writing business checks or charging credit cards for personal use is never a good idea. (Note: if the formalities are not adhered to, and there is a lack of “separateness,” you risk losing your liability protection; this is a very common mistake)
Failure to properly organize a Limited Liability Company can lead to what is commonly referred to in the legal community as “piercing the corporate veil.” This is where a court has concluded the LLC is nothing more than an “alter ego” of the owner – imputing the LLC’s liability. In this situation, the limited liability of the LLC is non-existent. For those who experience this, it can be quite the wakeup call.
Many believe their likelihood of being sued is quite low – shrugging off the importance of drafting and adhering to the formalities that must be met when operating an LLC. I often ask – “then why was the LLC formed in the first place?” When it comes to health, life, auto, and home insurance, one generally gives little thought to paying the premium(s) – we have been taught it is a “no brainer.” Much of this has to do with being brought up to know the importance of planning for the unexpected. Similar to insurance, an LLC is meant to protect from what we hope never happens. For the relatively low cost of having an attorney establish your LLC, and the high stakes in running afoul, why not do it the right way?
I hope this is now a “no brainer,” and that you seek a knowledgeable attorney to draft (or re-draft) your LLC operating agreement to include asset protection and ant-piercing provisions. Don’t fall prey to the “Not So Limited Liability Company!”
Attorney Joseph C. Jones advises clients on estate planning, asset protection, business law, and real estate law matters. Joe can be reached at (906) 914-4181 or firstname.lastname@example.org. Jones Law PLC is a Michigan & Wisconsin based provider of legal services.