Many states do not restrict a form of incorporation of LLC members. LLC shareholders can be either private individuals or legal entities – corporations and other LLCs. There are no constraints for a maximal number of members. Moreover, many states have an option to register a sole LLC, i.e. LLC with one owner.
Liability of LLC members
One of the reasons to choose LLC as a form of incorporation for business in the US is a so-called corporate veil, which protects shareholders’ property from creditors’ pretensions. An LLC is considered as a separate entity, obligations of which are not direct obligations of its shareholders. In other words, LLC members are protected from personal liability for business debts. But it does not mean there is no liability at all. Usually, if a limited liability company is not able to pay its debts, creditors have the right to lay a claim to company assets only, but no to shareholders' property. However, in several cases, a corporate veil may be pierced and a court will impose personal liability for LLC obligations on shareholders.
Personal liability of shareholders for LLC obligations
Business involves risks. That’s why it is crucial to understand when a corporate protection won’t work and you will be left one to one with creditors, carrying personal liability for LLC debts under the court decision. Common situations, not connected with criminal or malicious intent, are mentioned below.
Personal guarantees and financial carelessness
The easiest way to get trapped out of good intentions is to become a guarantor for a loan of a company, take up loan on personal property or sign a personal guarantee of performance of obligations under a contract. Consequently, if a company doesn’t have enough assets to pay its debts, creditors will claim to your personal assets. Using a credit card or having a personal loan is not the best option to finance your business because it presupposes personal liability for debts at once.
Less obvious are situations, which you may not notice in everyday business routine. However, creditors and the court, on the contrary, will thoroughly investigate activities of a company. First of all, they will figure out if the formal division of your company business and your personal financial relations were maintained.
Unstructured document circulation or its absence
Maintaining corporate document flow. If document circulation is not duly organized, in case creditors have claims and file them to court, it may lead to the conclusion that LLC members were hiding behind the company's name to conduct personal entrepreneur activity. In that case, corporate veil won't work and members or a member becomes liable for a company’s debts with his own assets. But if a business goes through hard times, creditors attack it and file cases, but the document flow is impeccable, the court will find the company guilty, but not its shareholders.
Let us imagine a situation: a company set up an account at an American bank, and its representative had done it without proper formalization of a protocol. Or a company started a new activity in the US, but hadn't documented it, and failed to pay off its debts. Creditors will apply to the court and it will require documents. If there are no documents, the court will likely to state that previous actions were initiated by shareholders personally, so they are to take personal liability.
Communication and personal signature
It is crucial in communication with contractors, officials and banks that every party should understand it is doing business with a company you represent, not you personally. While signing contracts and other documents, check the text and signatories information block. Sometimes the name of a business owner is indicated, but not their credentials. Keep in mind, that, signing a contract on your own behalf but not on behalf of a company, you become personally liable in case of a debt.
Lest before mentioned and similar situations should occur in your business, American Corporate Services, Inc. offers corporate documentary circulation management service, which will help your company to observe all essential formalities duly and on time. We are ready to advise you on any business question and find a decision for your individual situation.