Failure to comply with LLC formalities can result in individual liability to the members of the company if the “company veil” is pierced. Here are some important procedures to follow to maintain limited liability status.
Limited Liability for Company Debts
One of the principal advantages of forming a LLC is to limit or reduce your personal liability for business bills and debts. In some situations, however, the officers, members and managers may be personally liable for the LLC’s debts and obligations. When you begin business, many creditors may not extend credit unless you sign a personal guaranty agreement. A guaranty agreement is an express contract that makes you personally liable for the debt or obligation guaranteed. You can also become liable for the company’s debts or obligations as a result of your own actions. If you disregard LLC formalities or commingle your personal assets or interests with the company’s assets or interests, you can open the door for an adverse party to “pierce the company veil” and render you personally liable for the LLC’s obligations. To avoid such consequences, you should never refer to the LLC as “my” business or “our” business. Such a statement could later be used against you as being a representation that the business was a proprietorship or a partnership rather than a LLC.
Furthermore, it is important to carefully review all contracts, leases, credit agreements and similar documents prior to signing them to ensure that they do not contain hidden personal liability representations or guaranties. In addition, members, managers, officers, employees or other agents of a LLC are liable for their own negligent conduct when it injures another. Therefore, careful consideration must be given to the need to carry adequate liability insurance.
Payroll Reporting, Withholding and Taxes
The LLC should apply to the Internal Revenue Service for an employer identification number on the required Internal Revenue Service form. Funds collected by the LLC for FICA (social security) and withholding taxes must be paid to the government in accordance with the requirements of the law. Otherwise, those persons who are responsible for the withholding and deposit of such funds will be held personally liable for their nonpayment. This liability is separate and distinct from the liability of the employer.
Disclosure of LLC in Company Transactions
You should at all times do business under the LLC name exactly as specified in the articles of organization. You should not deviate from this name. Accordingly, all letterhead, invoices, receipts and stationery should be ordered to reflect the full and correct company name. Whenever a person signs on behalf of or for the LLC, he or she should add his or her title next to the signature so that it will be clear that he or she is acting as an agent of the LLC rather than in his or her individual capacity. If you sign a contract and fail to state your relationship to the LLC next to your name in the contract, you may be held personal liable as a party to the contract. A correct signature would be as follows:
[exact name of limited liability company]
[typed name], [title, e.g., President]
Any loans or banking activities should be conducted in the name of the LLC rather than your own name individually or you may become personally liable for those obligations. Likewise, all leases, contracts and other arrangements concerning your equipment, office premises and furniture should be handled in the same fashion.
Approval of Important Transactions
All important company transactions should be approved by the managers, with a proper resolution or written consent being adopted or executed and inserted into the company’s record book. If an important transaction is entered on behalf of the LLC but without authority, you may have personal liability regarding the transaction.
Distributions by the Company
The Oklahoma Limited Liability Company Act prohibits distributions by a LLC to its members when the company is or would be rendered insolvent (i.e., unable to pay its debts as they fall due) or when the company’s total assets are or would be less than its total liabilities. Improper distributions may be recovered for three (3) years from the date of the distribution. Before declaring a distribution it would be wise to take the necessary steps to determine whether the distribution is lawful.
This is a short summary of a few considerations you should consider, it is not an exclusive list of formalities you must follow to maintain limited liability status. You should not rely on this short summary exclusively when determining how to operate a company. If you have any further questions, don’t hesitate to call.