The Biggest Mistake You Might Be Making When it Comes to Your LLC
LLCs are Awesome
We are huge proponents of using an entity in your business to limit your liability of your personal assets from being affected by any liabilities that arise in the course of your business operations. Getting an entity in place can be a massive step forward in reducing your risk and helping you rest easier at night. In turn, it will be a crucial step in unlocking your full potential in your business since you can move forward in growing and operating your business without reservations or fears of unknown liabilities holding you back.
If you need a primer on all of the benefits an LLC can offer, please make sure to check out our past blog post on “Why Every Entrepreneur Needs a Legal Entity”. In the post, we provide some high-level tips on how to go about forming an entity. If you’re less interested in doing the process yourself and don’t mind paying a fee to have someone help, we refer our entrepreneurs to Biz Filings, by Wolters Kluwer as one option to check out for some extra hand holding.
LLC Formation is Not Enough to Get You Full Protection
It’s important to remember, though, that you can’t stop at just forming the entity to get the full benefits of it. The certificate that you get back from the Secretary of State is not your golden ticket.
Instead, you must use the corporate entity and respect it as a separate legal person. If you don’t, you risk a court piercing the veil of your entity which is just a fancy way of saying that the court would not respect your entity and will look through it to hold you personally liable. We’ve got a whole separate post on veil piercing which you can read more about here.
Once you have your entity formed, you need to make sure you are always operating your business from your entity, and not as yourself. The first step in making sure that is the case is to get an LLC agreement (sometimes also called an operating agreement) in place. We’ve got you covered there with a done-for-you template complete with video tutorial. This form is designed for anyone that is a solo owner of an LLC.
Once you’ve got that checked off your list, we also recommend that you set up a separate business bank account to make sure you keep your business accounting records separate from your personal records.
The Biggest Mistake We See Made By Entrepreneurs
Now, let’s address the mistake that we see entrepreneurs make when it comes to protecting the status of their entity. The biggest mistake we see time and time again is that entrepreneurs enter into contracts in their personal name instead of entering into contracts through their entity. This is a huge issue and is going to completely negate the fact you have an LLC at all.
It's critical that any contract you sign on behalf of your entity that you make sure is in the name of your entity.
We’ve received the natural follow up question which is … “How can an entity sign a contract?” The answer is that of course a natural person will need to sign the contract, but it needs to be made clear they are signing on behalf of the entity and in what capacity they are authorized to sign.
So, for example, if you are the sole owner of an LLC and your LLC is member-managed, then you can sign documents on behalf of your entity as the “Sole Member”.
If your entity is manager-managed and you are an appointed manager, then you can sign on behalf of your entity as “manager”. In some cases, business owners decide to elect officers of their entity, and in those cases, officers often have the authority to sign documents on behalf of the entity. Common officer titles granted are President, Vice President, and Secretary. It can be helpful to appoint officers if you have employees in your business, and you want to have additional people who can sign documents other than just yourself. Just be careful, however, not to hand out authority to sign contracts to employees unless you trust their judgment. It is never a good situation when you have an employee go rogue and bind the company to a contract that you would have never have wanted them to enter into.
Here's an example of how we would sign a contract for Dotted Lines. In our case, Dotted Lines is manager-managed:
Dotted Lines Co., LLC
[insert signature here]
By: Kelly Smith
If you get a contract from someone else, and they have listed your personal name and not the entity, then please do not be afraid to send it back and ask them to correct it. Usually, they will be happy to do so and just did not realize the name of your entity or that you wanted to enter into the contract through it.
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ALTHOUGH KELLY AND KRISTIN ARE LICENSED ATTORNEYS IN THE STATE OF TEXAS, NEITHER THEY NOR DOTTED LINES CO., LLC ARE YOUR ATTORNEY, NEITHER THEY NOR DOTTED LINES CO., LLC HAS AN ATTORNEY-CLIENT RELATIONSHIP WITH YOU, AND NEITHER THEY NOR DOTTED LINES CO., LLC KNOWS YOUR BUSINESS. THE INFORMATION IN THIS POST IS NOT TO BE CONSIDERED LEGAL ADVICE, AND YOU SHOULD NOT CONSIDER IT A SUBSTITUTE FOR LEGAL ADVICE. WE ALWAYS RECOMMEND CONSULTING WITH AN ATTORNEY IN YOUR LOCAL JURISDICTION SINCE THEY WILL BE ABLE TO ADVISE YOU AS TO YOUR PARTICULAR SITUATION AND ALSO PROVIDE YOU WITH INFORMATION SURROUNDING ANY NUANCES OF YOUR LOCAL LAWS THAT WE SIMPLY CANNOT ADDRESS IN THIS POST. FURTHER, WE DO NOT GUARANTEE ANY SPECIFIC RESULTS.