Limited Liability Company (LLC) as Asset Protection Device

So your Ohio Limited Liability Company has been properly established, you are not commingling funds or assets, and business is going well, when disaster strikes and your find yourself on the wrong side of a lawsuit (i.e. a defendant). The situation goes from bad to worse when you lose the lawsuit and a judgment is entered against you (perhaps you ignored the summons and did not respond within the time required, or the facts were not in your favor). Before long, the winning party, now a creditor, is attempting to collect on that judgment and you are attempting to figure out the extent of your financial exposure and if your company is at risk.

Let's assume that you took the necessary steps to ensure that your limited liability company is a distinct and separate entity from you as an individual (Check out these previous posts: http://generallygoodadvice.blogspot.com/2012/08/does-your-llc-really-limit-your.html; and http://generallygoodadvice.blogspot.com/2012/10/commingle-funds-and-your-liability.html). In Ohio, Code Section 1705.19 provides that a "charging order" is the sole and exclusive remedy that a judgment creditor may seek to satisfy a judgment against the membership interest of a member. This applies equally to a single-member limited liability company and one with multiple members. That means the creditor cannot take control over the LLC's assets, and the creditor cannot demand a distribution. Rather, the creditor must apply to the court for a charging order and then is limited to LLC distributions, if they are made (practically speaking distributions will likely be made at some point). Depending upon the amount of the judgment and the details regarding your limited liability company (profits, leveraged assets, etc), a creditor may be reluctant to expend the time, legal resources and money to pursue the charging order. 

The obvious questions are:

1. Have you properly established your Limited Liability Company in Ohio (or multiple LLC's in many circumstances)?
2. Have you properly transferred the necessary assets to your LLC?
3. Once the assets are transferred, have you taken additional steps to minimize their exposure and increase the protection of those assets?

And most importantly, if and when you receive a summons (or any legal document for that matter), contact a lawyer immediately to discuss your rights and any exposure you or your company may have. 

At Hallowes & Ebbeskotte, LLC, our Ohio business law attorneys are well versed in evaluating and providing guidance to business owners. If you have questions about your business, or would like us to review the structure of your limited liability company and establish an asset protection plan for you, contact me at josh@thehelawfirm.com or (614) 759-4603. Also, feel free to subscribe to this blog moving forward so I can keep you up to date and informed. 

Commingle Funds and Your Liability Shield May Disappear

Now that you have taken to heart the information provided in the previous post, Does your “LLC” really limit your liability?, don’t jeopardize the shield created between your business and your personal assets. I have often heard the phrase, “As a business owner, it is not ‘if’ you get sued but rather ‘when’ you get sued.” In determining whether a business owner is personally liable for the debts of a company, courts evaluate a number of factors, the most important of which is whether an owner’s personal funds have been commingled with the funds of the business. Frankly, if you treat your company as your personal piggy bank by using your company’s funds as your own, there is a good chance your personal assets will be exposed to your company's creditors (e.g., Plaintiffs suing your company).

Commingling takes a variety of forms, including but not limited to:

1. Failing to establish company checking and credit accounts that are separate from your personal accounts;
2. Utilizing company credit cards or accounts to pay for personal expenses;
3. Loaning money to or borrowing money from your company WITHOUT DOCUMENTING THE TRANSACTION (for example, record a resolution in the corporate minutes, execute a valid promissory note with fair market rate interest, and ensure that regular payments are made);
4. Depositing company funds (e.g., checks payable to your company) into your personal account; and
5. Failing to properly title company property.

While the list set forth above is by no means exhaustive, it does provide an overview of the most common examples of commingling that you should avoid. In addition to risking exposure to personal liability, commingling often results in understating or overstating deductible business expenses, as well as difficulty in creating financial reports and determining the best direction for your company.

Do not succumb to sloppy business practices, and be sure to document, document, and document. In the event that commingling does occur, correct it immediately. Maintaining the separation of owner and business is a critical component to protecting your personal assets.

As a business law attorney at Hallowes & Ebbeskotte, LLC, my goal is ensure that your business operates in a manner that protects you personally. If your company is a mess, and you need help cleaning it up, please feel free to contact me at Josh@theHElawfirm.com (or at 614-759-4603) or visit our website at www.theHElawfirm.com.

Does your “LLC” really limit your liability?

As a business owner, the question is not "if" you will be sued; rather, it is likely "when" you will be sued. To protect against personal liability, the Limited Liability Company (“LLC”) has become one of the more popular entities chosen by business owners to operate their respective businesses. The LLC provides the flexibility and ease of creation of a partnership while at the same time establishing a liability shield similar to a traditional corporation.

My experience in meeting with business owners is that there is a common misconception that so long as Articles of Organization are filed with the Ohio Secretary of State, the owners will get the full protection of the LLC. However, in order to be protected from personal liability, you must establish that the LLC is a separate entity from you as the owner (or owners). In order to do this, it is advisable to take some steps above and beyond merely filing the Articles of Organization.

First, you need to choose a business name and make sure it is available. In Ohio, the name of your LLC must contain some specific words, as well as be distinguishable from any other names on file (with some limited exceptions). Typically you complete this step before filing the Articles of Organization.

You should also negotiate and execute an Operating Agreement. An Operating Agreement will differ if the LLC is a Single Member LLC versus a Multimember LLC. Additionally, the Operating Agreement should address tax treatment, buy-sell options, management, capital contributions required from each Member and how profits and losses will be allocated. While there are template Operating Agreements available, an Operating Agreement should be tailored to your business, your Members and your specific situation to increase the likelihood of protection from personal liability.

At Hallowes & Ebbeskotte, LLC, we create and maintain a Company Minute Book for your LLC that includes all of your company documents, including the Articles of Organization, the Operating Agreement, Subscriptions to Membership Interests, Organization Minutes, Membership Interest Certificates, Descriptions of Membership Interests, and Capital Contributions.

Don’t forget to determine what tax and other regulatory obligations the LLC is subject to, along with any required registrations. These include requesting an Employer Identification Number (“EIN”), registering for Ohio payroll taxes and BWC coverage, and required notifications when new employees are hired.

Once the LLC has obtained an EIN, the Articles of Organization have been approved, any requisite local licenses and/or registrations have been obtained, and bank accounts have been opened on behalf of your LLC, you are ready for business.*

Remember, to protect yourself from personal liability, it is critical that you take the proper steps to establish the liability shield a limited liability company can provide. Visit http://thehelawfirm.com for more information on how the business law attorneys at Hallowes & Ebbeskotte, LLC can guide you through the necessary steps.

*Future posts will address the importance of refraining from co-mingling your personal funds and assets with the funds and assets of the LLC in order to maintain personal liability protection. Stay tuned…