When a person puts capital into a limited liability company in exchange for a membership interest, he or she has no legal right to get that capital back unless the LLC and the person otherwise agree to a guaranteed return in a written agreement.  If, on the other hand, a person loans money to an LLC, then the LLC (not the other members) has an obligation to pay back the loan per the loan agreement terms.

In either case, other members of the company are never obligated to personally pay back any capital or loans of another member unless there is some specific side agreement where a member agrees to this.  The LLC protection provision specifically states that no member is personally liable for the debts, obligations or liabilities of an LLC merely because he or she is a member.

HOWEVER, in practice, there are several situations where you could be personally liable to another member:

1. If you personally agree to pay it back at the time.  This is known as a personal guarantee and if this agreement was reached, then yes, you are liagle not under the LLC laws but because you legally agreed to it.

2.  There are securities related laws that you can personally be liable for if you violated them.  If you started your LLC and then went out and found or solicited investor and they put money into your LLC, there is some risk that they may later come back and said you provided false and misleading statements about the investment or the capital raising did not comply with securities laws. This area of liability is beyond the scope of LLC concepts and can get quite complicated.

If you are going to third parties to solicit investment in exchange for ownership interests in your LLC business, you must hire a good business and securities lawyer to assist you with the transaction.  Yuor lawyer will ensure that sufficient disclosured and paperwork are involved so that you will later avoid any personal claims for liability if the LLC business does not work out.

While forming an LLC entity itself is straightforward, the strucuring of relationships among members and investors can be complex and it is wise to get attorney help to protect you and your business.

Also just a side note, you mention INCORPORATE LLC.  The term incorporate is technically a corporation legal entity term and not one applicable to a limited liability company.  An LLC is organized or formed under state law.  It is an unincorporated entity that happens to have all the advantages and benefits of an incorporated entity (corporation). 

Because the LLC is an improvement upon the corporation for most small businesses, it is often referred to as an incorporated LLC, LLC corporation or limited liability corporation. Just a clarification.

The limited liability company agreement is the key document for your LLC business. But, in order for it to be honored, every member of the LLC should agree to be bound by every provision of this agreement.

How do you do this?  Just follow these steps and you will take care of this requirement:

1. When you adopt your first limited liability company agreement for your LLC, every person who is a member of the LLC at that time MUST sign the agreement.

2. The agreement for your LLC must include a provision in the section of New Members that a condition for any person becoming a member of the LLC is that such person sign a written agreement agreeing to be bound by all terms of the LLC’s then existing limited liability company agreement.

3. When a person becomes a member of your LLC, make sure he signs a written document that explicitly states that the member agrees to be bound by the terms of the LLC Operating Agreement. Members can sign an amendment to the agreement or a separate document which is known as an Operating Agreement Addendum.  These signed documents get attached to the existing official limited liability company agreement.

There have been many expensive lawsuits dealing with operating agreement that were not signed by every member.  This causes a lot of confusion and issues.  Bottom Line- every person who is a member must sign the actual LLC operating agreement or a document stating that he or she agrees to the terms of the agreement.

You will find a lot of commentary out there about forming an LLC in other states such as Delaware or Nevada.  You may hear that Delaware or Nevada has better established LLC laws when it comes to protection, flexibility and privacy. 

In my experience, if you are going to be conducting your business from your home state, then for 90% of small businesses, you should set up an LLC in your home state.  Here is why:

First, when it comes to protection, every state in the US has LLC laws that provide the same fundamental LLC protection.

Second, it is true that some states require less information to form an LLC then others.  This is a benefit in that you have more privacy in some states when it comes to your LLC business. BUT (and this is a big BUT),  if you are going to run your business from your state, you are going to have to register your LLC in your state no matter what.  If it is not formed in your state, then it will be registered as a foreign LLC.  Any registration will require that you disclose the same information you would have to disclose if you had formed the LLC in that state to begin with.  So, the privacy benefits will not be received. 

PLUS, if you form a limited liability company in another state and then have to registered it in your state, this means paying filing and maintenance fees in two states, possibly having reporting obligations in two states and maintaining a registered agent in both states.  For most small business, the added administration is not worth the effort.

In 10% of the cases, forming in another state may be beneficial such as if you have investors in other states who require it, or you need a series LLC (which is only recognized in some states).  If you are going to take in professional investors such as venture capitalists, you may want to consider Delaware but in these situations, you will likely not be picking an LLC in the first place.

An LLC is designed for the small business owner who runs his or her own business.  Having your LLC in your home state is the simplest and easiest method for gaining the benefits and protections of a limited liability company.

Visit limited liability company home page of The LLC Expert

A common thought among busy business owners is that they will form a limited liability company later when there business gets to a certain size.  By running your business as a sole proprietor without the use of an LLC, you are actually creating a ticking time bomb for liability.

You see, lawsuits are almost always about money.  The more successful your business gets, the more likely you will be targeted.  Litigation lawyers love sole proprietors because they have so much more at risk when a lawsuit is filed.  This means the lawyer has more leverage to extract more money from you to arrive at a good settlement.

So, my first point is that an LLC only protects business activity after forming a limited liability company.  Any activity performed before then can come back to haunt you- even years later.

My second point is very important- if you are presently being sued or in the midst of a dispute which could lead to you being liable, you cannot now form an LLC for purposes of protecting your assets.  If you do this and transfer your assets to the newly formed LLC, you could be liable for a civil offense called Fraudulent Conveyance.

This will lead to you owing significantly more money in fees and penalties and, in some egregious and intentional cases, fraud can be criminal which could lead to imprisonment.

BOTTOM LINE.  Be smart and form a limited liability company at the beginning to conduct all of your business activity as this will be protect you and your assets for future years to come.

Many business owners want to compare an LLC to a corporation when deciding which legal entity is best for their business.

Both forms offer limited liability protection for their owners.

Generally, the LLC is ideal for the small business enterprise where the ownership is held by one or just a few owners.  The LLC offers more tax choices and a simpler structure which has lesser requirements when it comes to maintenance and governance. The LLC is also a more flexible entity which allows owners to operate their business the way they want.

The corporation is the older of the two entities and is definitely the right choice for a company that wants to go public (have an initial public offering) or one that needs to take in venture capital investors as those investors will require a corporation.

The answer of LLC or corporation depends on your specific situation and many factors to into this inquiry including legal, business and tax matters.  The LLC Expert has recently launched a more in-depth article about the comparison factors between the two entities:  LLC or Corporation?

In May of 2007, the second circuit ruled in the McNamee v. IRS case that a single member of an LLC was personally liable for the employment taxes owed by the single member LLC that was taxed as a disregarded entity for federal tax purposes.

The court specifically states that the personal liability existed because the LLC did not elect to be taxed as a corporation.

This is an important ruling for those single owner LLC businesses that plan on having employees.  It may be worthwhile for those single member limited liability companies who have or intend to have employees to consider electing S corporation tax status to protect against this personal liability.

Please note that the IRS can still find members liable if those members had the responsibility of filing those taxes and were negligent.

Taxes involve one area you want to be sure are properly being reported and paid. 

I often get asked by a solo business owner whether it is worth the effort to create an LLC for their business.

The biggest reason that any business, solo owned or otherwise, should be run through a limited liability entity such as a limited liability company is for personal liability protection.

The costs to create and maintain a limited liability company is so low and the number of business related lawsuits are rising dramatically. Without an LLC, you are subjecting yourself and everything you own to risk of loss. Why do this?

You may start asking yourself- “well, who would ever sue me?” This is the famous question asked by the thousands of sole proprietors who have been sued and lose their home and personal assets every year. Lawsuits are about money. Once you have assets or your business starts to become successful, you become a higher risk target.

Instead of asking what the changes are of you ever getting sued (which is much higher than you think), analyze the costs to create and maintain an LLC for your business v. the potential loss if you do not.

Operationally, once you create an LLC, there is little difference in how you would run the business other than the fact that it will be the LLC who is the business entity. There are very little formalities and no legally required meetings or formal approvals.

From a tax perspective, there is no difference, a single member LLC is disregarded as a separate entity for federal income tax purposes only. You would file your business taxes
the same way as if you were a sole proprietor.

Protect Yourself.

No.  You must do your homework and insist on using a reputable and useable LLC Operating Agreemnt form as a starting point for the Operating Agreement for your limited liability company.

The form structure, language and topics covered in a sample operating agreement (form) is very important because this agreement serves as a users manual for the managers and officers of a limited liability company. If you start off with a substandard or improper form, you are only asking for trouble.

I have looked at many form operating agreements available on the Internet and it is obvious that many of them were not drafted by a business attorney who actually practices in this area of business law.  Some use way too much legalese as if they are trying to impress a customer.  Legalese may sound like competency but it does little to help when the business people are trying to figure out how the provisions apply to their business.

Others have no order to the way the important LLC topics are addressed in the agreement.  A well written operating agreement for a limited liability company should have proper articles and sections and each one should have an easy to understand heading.  Again, this will help the users of the agreement to find the information they need when running the LLC business.

I have written a more detailed article on other essential requirements for an Operating Agreement for a Limited Liability Company at www.TheLLCExpert.com

The LLC Expert offers quality forms as a starting point or this is one area where retaining a qualified LLC attorney to prepare this document for your busines is well worth the costs.

Many LLC owners ask me whether or not it is necessary for them to have an Operating Agreement for their LLC. After all, in most states, a written Operating Agreement is not required to have an official and proper limited liability company.

This is the one question I will always answer the same regardless of who is asking.  You must always have a written Operating Agreement for an LLC business. There are several reasons for this.

First, having an operating agreement buttresses your liability protection.  It is a solid sign that the LLC is an entity separate and apart from owners which is a necessity to preserve the liability protection shield.

Second, having an operating agreement for an LLC reduces the risk of member disputes.  By having a well written operating manual for the LLC (which is what an operating agreement is in most cases), the members, managers, officers will have certainty when it comes to running the LLC business.

Third, many third parties will insist that the LLC have a written operating agreement,  Make it easier to do business with others (like banks, vendors, service providers, etc.).

Fourth, the operating agreement serves as a users manual or roadmap for operating the business.  The process of creating and customizing one for your LLC business and discussing it with any necessary parties is an effective business planning tool.

The creation of an Operating Agreement for your LLC is one area where getting the advice of an LLC attorney is well worth the cost.

If costs are an issue, consider a legal membership plan where you can at least get a contract review by a business attorney or, at the very least, insist on obtaining a professional operating agreement form drafted by LLC knowledged professionals as a starting point for the do-it-yourself business owner.

If you have an existing limited liability company and now want to admit a new Member, you need to consult with the provisions in your LLC Operating Agreement to determine how to admit a new Member.  This Agreement governs the requirements and processes for your particular LLC when it comes to admitting a new Member to your limited liability company.

Generally (although this can vary based on the specific LLC’s rules), a vote of the Members will be required to admit a new Member and so a certain percentage of the current LLC members must approve.  Make sure all pre-admission requirements set forth in the LLC Operating Agreement have been met.

After approval, the LLC should make sure that the issuance of Membership Units to the new Member is in compliance with any applicable state securities laws. Security laws are beyond the realm of LLC laws but generally if the member being admitted has a pre-existing relationship with you and the LLC and will be active in the management and operations of the LLC, there should be no state limitations.

On the other hand, if the member is more like an investor and will be contributing substantial money or other property in exhange for an ownership interest, please check with your local attorney to determine if there are any securities related obligations.

Once security related issues are cleared, then, a document, commonly called a Membership Issuance Agreement should be prepared and signed by the LLC and the new Member.  And, finally, and most important, the new Member must sign a written document agreeing to be bound by the LLC Operating Agreement of the limited liability company.  The records of the LLC need to be updated to reflect the new Member.

If the Member is required to commit capital or services in exchange for his or her Membership Units, it is very important that these obligations be set forth in a writing signed by the Member.  In the event the Member is required to provide capital or services over time, it is a good practice to provide for a mechanism where the Membership Units are forfeited or transferred back automatically if the new Member fails to meet his obligations.  These types of arrangements can vary tremendously based on each situation so it is good practice to hire your attorney to properly document these transactions.

The LLC laws generally do not require that members of a new LLC hold an organizational meeting after the limited liability company is formed. This is different from a corporation – most states require that a new corporation have an organizational meeting to complete the incorporation process.

While an LLC organization meeting is not required, I strongly recommend that every new LLC hold one. It is important to the success of any new venture that the members and the LLC start off properly.

The most important factors of starting off “properly” are to make sure all the remaining details of starting the new business venture are being handled and ensuring that all members understand the business plan, the LLC rules and processes, and their roles and responsibilities moving forward.

An organizational meeting can be very informal and really just requires that all members get together preferably in person but it can be via conference call if necessary.

The typical agenda of an organizational meeting includes:

1. Reviewing and Adopting the Articles of Organization and Certificate of Formation/Organization for the LLC.

2. Confirming the relative ownership of the LLC for each Member and the specific capital contribution requirements to be made by each Member. This should be documented in the LLC Operating Agreement.

3. Presenting, Discussing, Approving and Signing the LLC Operating Agreement. This is the most important matter in an organizational meeting. The LLC Operating Agreement provides the
foundation of the LLC by evidencing the ownership structure and imposing a set of rules for how the LLC will be governed. It is very important that every Member understand this document and agree to it.

4. Appointing officers for the limited liability company (LLC officers)

5. Adopting any resolutions required to open a bank account or otherwise start business

6. Determining any other new business requirements needed for the particular business venture and assigning task for completing these requirements (e.g., business licenses, tax registrations, finding office space, marketing).

7. Confirming the roles and responsibilities of each Member and documenting these as requirements in a written document signed by all members and the LLC

8. Revisiting and confirming the business plans and objectives of the new LLC venture

Many business owners who currently operate an existing business as a sole proprietorship desire to use a limited liability company for that business.  This is the best decision a sole proprietor can make as he or she will benefit from the limited liability protection of an LLC as well as the other many LLC benefits.

Because a sole proprietorship is a business which is not housed in a current legal vehicle (such as an LLC, corporation or partnership), there is only one way to accomplish this.  The sole proprietor will form an LLC and then need to transfer the individual assets and liabilities of the current business into the new LLC once formed.

Transfer of assets are typically documented with a Bill of Sale and the transfer of contracts are done by assigning the contracts.  If the sole proprietor will continue to own 100% of the LLC (or at least 80%), there generally should be no significant income tax consequences but there are exceptions depending on the specific assets being transferred.

Accordingly, you should always obtain the advice of your accountant and CPA to determine any tax consequences (income taxes, sales taxes, filing fees, etc.).  A good accountant may have ways to accomplish the business transfer in the most efficient way.

While a transfer from a sole proprietorship to an LLC is not difficult on paper, it is very important to notify your customers, vendors, employees and all third parties about the new business entity being an LLC moving forward.

While many sole proprietors delay this decision because they do not want to go through the transfer, the longer you wait, the more difficult and time intensive the transfer will be.  In the meantime, with each day, you are subjecting yourself and your family to significant liability potential that can be minimized by using an LLC as your business vehicle.

If you are unsure about whether it is worth it to switch to using a limited liability entity such as an LLC, I am the author of a popular article which goes into the what you should be thinking about when deciding whether a limited liability company is worth the benefits you get: Form an LLC v. Sole Proprietorship

Many husbands and wives start business ventures together – it is a great thing to be able to work together to build something.

For state purposes, an LLC that has ownership interests issued to a husband and other ownership interests issued to a wife is considered a multi-member LLC for state purposes.  Each person has his/her own set of ownership interests. 

For federal income tax purposes, the classification of the LLC depends on whether the state of formation is a community property state (e.g., Arizona, Texas) or not. 

The great majority of states are NOT community property states.  In these states, a limited liability company owned by a husband and wife is considered a multi-member LLC and so is taxed, by default, as a partnership.

If the state is a community property state, then the IRS views an LLC owned by a husband and wife as a single member LLC and so it can be taxed as a disregarded entity.  In other words, the LLC qualifies as a single member LLC for federal income tax purposes only.

A new business will always need some capital or access to capital to start a business.  Even an ongoing business may need funds from time to time as it deals with cash flow deficiencies or expansion.

While  a limited liability company has the right to borrow money, the most common method of getting initial capital is by having the initial members contribute capital to the LLC in exchange for their membership interests.

However, a member can also loan money to an LLC even if he or she is a member. 

When a member contributes money to an LLC, it is very important that the transaction categorized as either a capital contribution or a loan and that the transaction be documented in sufficient written documents.

When money sent is a capital contribution, the amount is credited to the member’s capital account but it is not a loan that the LLC is required to pay back.  No debtor-creditor relationship exists.  If that member is later distributed profits back, it will be credited against the capital contribution amounts of the member.

When money sent is a loan, a debtor- creditor relationship is formed.  The LLC owes the member the money back.  The terms of the loan (amount, interest rate, repayment terms, default provisions) should be documented in a written loan agreement or promissory note between the member and the LLC.

If there are other members, the loan transaction should be approved by the LLC membership because it is called a “interested transaction” (one between the LLC and one of its own members).  It is really important that the loan transaction be fair and equitable to the LLC to avoid any unfair transactions benefitting the lender member.

So, in summary, the LLC and the member can agree on how money sent from the member to the LLC is to be categorized.  The categorization of a member capital contribution or a member loan results in a different transaction and different treatment of the transaction by both the LLC and the member.  In order to avoid later disagreements, this categorization should be agreed upon and sufficiently set forth in writing signed by the LLC and the member . . . and if applicable, the proper governance vote should take place with all members to approve the transaction.

I get so many questions from members of an existing LLC about the ability to “get rid of” or remove another member from the LLC.

The ability of an LLC or another member to unilaterally remove another member is only possible if there is a right to do so in the LLC Operating Agreement of the LLC and the member to be removed has agreed to be bound by the LLC Operating Agreement.  This right can also be in another separate document as long as the agreement is in writing and the member to be removed agreed to that document by signing it.

Absent any provisions in a written document that provide for automatic renewal, one cannot unilaterally take back an LLC ownership interest previously granted to an LLC member.

An LLC Ownership interest is personal property just like stock in a corporation or any other personal asset you own like your car or a book you bought from the store.  No one can just come and take your car away from you or take any of your personal belongings unless you have signed an agreement agreeing to allow them to take it back.

The law in the US protects ownership and so once an LLC issues an ownership interest to a person and that person becomes a member, the ownership interest held by that member is personal property of that member and is only subject to any restrictions contained in the LLC Operating Agreement.

This issue is an important one though for multi-member LLCs.  If members of an LLC have disputes or otherwise do not agree on an LLC matter, sometimes the LLC will end up in deadlock which is not good for anyone.  So, the astute LLC owner should address this in the LLC Operating Agreement.

Similarly, some LLCs grant membership interests to a person with the assumption that the person will devote time and efforts to build the LLC business.  After issuance, what happens if the person does not do anything- does he/she still get to keep the interest?  If there was no agreement in writing providing for a forfeiture or a vesting based on the services to be provided, then yes, an outright issuance without any restrictions gives him/her an absolute ownership right.

In summary, it is important for all planning issues that an LLC or its members may face to be addressed at the beginning of an LLC arrangement in the LLC Operating Agreement or in other legal agreements between the LLC and its members.

A common method for allowing the automatic removal of a member is called a buy-sell provisions which allows the LLC to buy back the interests automatically at a FMV or a predetermined price.  These provisions can be quite complex and should be tailored to your LLC based on your specific LLC situation and your members.  Retaining a qualified attorney to advise on these matters is always recommended.

Once an LLC is formed, the members of that limited liability company will need to select a management structure to govern the LLC.  There are two main structure: (i) member managed and (ii) manager managed.

In the great majority of states, the LLC is member managed by default.  This means that if you do not make a choice, the choice is made for you.  In some states, if you want your LLC to be manager managed, you will need to include certain required provisions in the formation documents you file with the state.  So, please look out for these requirements or make sure the lawyer or document filing service you use to form your LLC knows you want your LLC to be manager managed in this case.

So- which structure should you choose? 

If you look at most small business LLCs, you will see that they are member managed.  Member managed is the simplest structure and means that every member has authority to act on behalf of the business.  If all your members will have direct involvement in the management of the company, then a member managed LLC usually makes the most sense.    Internally, the members will agree on how they and when they will vote on certain LLC matters and agree with each other that they will each not act on behalf of the LLC until the proper votes are obtained.

A manager managed LLC is generally used when there are “passive” members in the LLC.  Passive means investors in the LLC who do not actively manage or otherwise operate the business of the limited liability company. If your limited liability company has passive investors, it is usually recommended you have a lawyer between the members and the managers.

With a manager managed LLC, the members, by virtue of being members, do not have authority to manage and operate the business of the limited liability company.  Instead, the members elect “managers” and it is the managers who have this authority.  It is important in a manager managed LLC that the LLC Operating Agreement have specific rules and processes for the managers to follow when managing the LLC.  They have duties to act in the best interests of the LLC.

Now, a manager can also be a member of the LLC.  If a manager is an adult (over 18) natural person, the LLC laws do not imposed any restrictions on who can serve as managers.  In some states, there may be restrictions on having a leval entity (such as another LLC or a corporation) be a manager.  

Most business owners create a limited liability company for their business in order to protect their personal selves and their personal assets from the liabilities and obligations of the business.

However, another liability concern relates to what is known as “reverse” liability. If a business owner is sued in his personal capacity for something totally unrelated to his LLC business, is the LLC business protected from being taken over by the person who obtains a judgment against the business owner personally?

The LLC laws of most states contain a “charging order” provision in them which is a great benefit of owning a business through a limited liability company.

The charging order provisions generally state that a creditor of a member of an LLC can only seize the economic rights of the LLC ownership interest held by that member. In other words, the creditor can never get the full ownership and never have voting or management control over the LLC business. What does this mean?

It means that you, as an LLC owner, will continue to be able to run the LLC business as before, and you, as a manager (along with other managers) can decide not to pay out any profits distributions related to ownership interests. This would result in the creditor not receiving any money for foreclosing on the LLC ownership interest AND actually being liable for the tax related to profits of the LLC business that were retained in the company.

Given this, most creditors will not look to take any LLC ownership interests because the potential result could be that the creditor will have to pay taxes on profits he never gets.

LIMITATIONS OF CHARGING ORDER PROTECTION

While charging order protection provisions are found in most state LLC statutes, an important bankruptcy case held that charging order protection would not apply to single member LLCs. This is because the reason for the charging order is to protect other members of your LLC business and the LLC business itself from business interruption related to the personal liabilities of one of its members. With a multi-member LLC, the interests of a personal creditor of one member should not take precedence over the LLC and the other innocent members.

However, if the LLC is owned only by one member and it is that member who is personally liable to a creditor, then in bankruptcy, the law will ignore the charging order protection and could allow the creditor to foreclose on the entire LLC ownership interest and business. To be safe, practitioners are advising that charging order protection should not be relied upon in any single member LLC situations either within or outside of bankruptcy.

This article discusses charging orders generally, but each state has its own scope and details for charging order protection so if this is an important issue to you, please check with your local attorney to receive specific advice for your jurisdiction and circumstances.

Once your limited liability company is formed and an LLC Operating Agreement is adopted that provides the LLC with members and a governance structure, then what is required for the LLC to start acting like a business?

GENERAL AUTHORIZATION

The limited liability company can only act through its members, managers and/or officers.  The LLC Operating Agreement should provide who has the authority to act on behalf of the limited liability company.  In the more simple member managed LLC structures, the members themselves have the authority to act on behalf of the LLC and are the agents of the LLC businesss when conducting business activity.

It is also common for a limited liability company to have operating officers such as a president, vice president, treasurer/CFO, and secretary.  Each of these officer positions are given authority with respect to its title.  An LLC can also hire employees and grant employees certain authority and responsibilities that can include acting on behalf of and binding the limited liability company.

SPECIAL ACTIONS USUALLY REQUIRE A MEMBER VOTE

It is not practical to require that every LLC action or decision be brought to the Members for an official vote of approval.  Accordingly, for day to day operational matters, the managing members, managers and/or officers make such decisions. 

However, it is often recommended that the agents of the LLC should not be able to make certain major decisions for an LLC without a proper and formal LLC member vote.  These decisions are generally listed out in the LLC Operating Agreement and subject to a specific rule that requires the approval of Members holding a certain percentage ownership of the limited liability company.

Common examples of such decisions include borrowing money, entering into transactions with a Member, selling all of substantially all of the assets of the LLC, entering into any major purchases of assets, and entering into a strategic transaction.

With some limited liability companies, only a majority vote will be required to approve while in others a higher vote or a unanimous vote is required. Each limited liability company has the flexibility to determine its own set of rules for how the LLC will operate in business, who can properly act on behalf of the limited liability company and when prior member or manager approvals are needed.

CAN I FORM AN LLC TO GET RID OF EXISTING PERSONAL LIABILITY?

I get inquiries almost daily from people who are dealing with a current problem or lawsuit and they want to know if there is a way for creating an LLC at that point and use the LLC to somehow avoid being liable for the potential liability or lawsuit in question.

The answer to this is always “NO.”  An LLC only exists from the point it is created.  So, if you were to form an LLC today, it did not exist with respect to any business or other activity that took place before today.  While one can transfer liabilities to the LLC and have it be responsible, the transfer does not alleviate the person from being personally liable if he or she was liable in the first place. You cannot get rid of any personal liability by using a limited liability company.

In addition, even if your business was in an LLC, there are some personal liabilities that LLC protection does not reach.  These include those in which you personally agreed to be liable for (such as a loan guaranty or a guaranty to a lease agreement)  or your own negligent acts.  You can never act negligent or in aways that are unlawful and be able to hide behind an LLC.  The law will hold you personally responsible for your own tortious acts.

But aside from the limitations, creating an LLC for your legitimate business activity is always a good idea and sometimes it takes a lawsuit or dispute to open your eyes to these issues.

For example, I had a client once who owned investment property in his own name.  He and his tenant had a dispute about what rent was owed and other issues, and he was personally liable to address all this.  Given that there was a lawsuit in his own name, he had to disclose this in his credit applications and reports and it affected his personal and business life.

While he could not avoid the personal liability for this one tenant and the tine period to date, he could avoid similar issues for future periods by forming a limited liability company and transferring his investment properties into an LLC and his contracts into the LLC name.  Then moving forward, he should have his limited liability company be the business party to his leases and vendor agreements.

It is never too late to minimize future liability potential by forming an LLC using the limited liablity company for your business, but the limited liability company cannot be used to get rid of existing personal liability and it can never be used as an instrument to avoid being liable for misconduct, fraudulent, negligent and unlawful acts you engage in.

When it comes to choosing a name for your LLC business, there are two areas to plan for: (i) LLC name availability with the corporate agency in your state; an d(ii) trade name protection (which falls under trademark/trade name laws).

LLC NAME AVAILABILITY WITH THE STATE AGENCY WHO FORMS LLCs.

Choosing an acceptable LLC name for your new limited liability company should be done early in the pre-formation process.

In all states, you cannot use a name which is the same as or too similar to another name already being used by another limited liability company or other legal entities (such as corporations) in a state.  In some states where companies can register fictitious names, those states will also not allow an LLC to use the name of a filed fictitious name as well.

So, prior to finalizing your LLC name choice, you should check with your state of formation to see if your name is available for use in that state for a limited liability company. Informal name checks are not binding and sometimes you can get an approval on the phone and then find out that the person processing your paperwork rejects your name because it is “deceptively similar” to another LLC name.

One way to prevent this surprise is to reserve an available name with the state. In most states, there is a process to reserve a name for a stated period upon the filing of a form and payment of a nominal fee.  Consider this when your LLC name is very important for your business.

TRADE NAME PROTECTION

Just because a name is available for use as an LLC name by the state agency who forms LLCs does not mean that there are no other potential issues with using that name to promote your business.  Trademark and trade name laws protect other people and businesses who are using a pre-existing name in the event someone else tries to use such name in its business and the use causes confusion in the marketplace.

Accordingly, you should check do some research to see if another business with a similar business model or similar products/services as yours is using your desired name in the areas where you will sell your products.  For local businesses, conduct local Internet searches and check in telephone books or in directory lists of local chambers of commerce.  For national businesses, you should research nationally and consider ordering a trademark search to see if there could be any potential issues.

Name litigation fights are very costly and will not arise until you have made huge investments in promoting your business and name.  Do your homework on the front end and ensure at the beginning of your LLC business that your chosen name is proper.

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