…an LLC is a good defense, but only if you maintain it.
When most people start a home care company the advice that they get is to set up an LLC. The reasoning is sound. The LLC is set up as a separate entity from the owner (or agent as they are usually referred to) so if there is a lawsuit it acts as a shield against your own personal assets being the target of the action. They can bleed the LLC dry, but that is where the losses end… unless you have made certain mistakes along the way that leaves the door open. Keeping those doors closed is the focus of this article.
Rule #1
You must at all times, treat the company as separate from yourself and your personal finances.
What this means is that you don’t pay for personal expenses on the company’s dime, ever. If you hit some big expense in your personal life you don’t take a big draw on your LLC to offset it. It may seem unimportant at the time but in a legal situation, it is concluded that you and your LLC are not being treated as separate entities it sets the stage to ” pierce the veil” as it is called. Because, if you didn’t treat it as separate why should the prosecutor?
What this means on a very practical level is that you should keep a personal emergency fund in your personal account equivalent to 1 month’s expenses, held separately so that you are not forced (or tempted) to raid the company account in a pinch. If you have questions if something is a legitimate business expense, check the IRS’s website or talk to your CPA.
Rule #2
The LLC must have its own bank account, this is a no-brainer, but there are times that people skip this step. Often early on people will think it’s OK to keep all the money in your own account with a plan to “do that later”… Don’t, most of the time you can open an account easily with a small amount of money. It’s actually a good idea to open up the account from a separate bank entirely than you use for your personal banking, reducing the risk of accidentally grabbing the wrong card to make a payment. Again, clear lines, you are not your LLC.
…clear lines, you are not your LLC.
Rule #3
Have an LLC operating agreement. Yes, even if it is not required in your state. An operating agreement is essentially a document that lines out how your LLC will be administrated, who its agents are, and how the resources will be managed. Having an actual operating agreement that you actually operate by is essential in defending your LLC if you find yourself in a bad scenario by preventing it from becoming a worst-case scenario.
Rule #4
Have a CPA set your LLC owners to draw, and stick with it. Your owner’s draw may not be a set amount, for example in the early stages of the business, it often makes sense that it is a percentage of the net. That’s OK, or a set dollar amount. What you must avoid is the appearance that what you take out of the account is based on your personal needs, instead of what is lined out in your operating agreement. Why have your LLC Owners’ draw set by someone else? Some would say that I am taking a belt AND suspenders approach but having it set by your financial adviser creates a further separation of you from the business money. Just a reminder, make sure that the payment is enough to fund that emergency fund I mentioned above, trust me, you’ll sleep better with that standing by in case of emergencies.
Rule #5
Keep good clear financial records and document all transactions. Bookkeeping is essential, it’s hard to defend that 100% of your business expenses are ACTUALLY business expenses when you can’t prove what you spent the money on. You may have done nothing wrong, but if your bookkeeping is not up to snuff, you can’t prove it. If your books don’t add up, or there are lots of transactions being filed in “Micilanious” by your bookkeeper, you should question his or her effectiveness.
Rule #6
Don’t be stupid. The LLC will not protect you if you incur charges that the LLC clearly will not be able to pay. The LLC is a bit of a fragile shield. If the courts see that you are using it irresponsibly to protect yourself from charges that you were clearly not able to cover, they will take that into account.
Rule #7
Sign as Agent. It’s a simple fix, but an important one. When signing a contract on behalf of your LLC, sign “on behalf of X LLC” or in the role line write “Agent” which identifies that you are attributing that to the agency, not yourself personally. If you don’t sign as an agent, that contract is with YOU, even signing as “owner” can be problematic. Yes, you are the owner of the LLC, but you are signing as its agent.
In conclusion, an LLC is a good defense, but only if you maintain it. Some steps like signing agreements correctly are easy, and others like cleaning up 10 months of lousy bookkeeping are hard. If that is where you find yourself we at Homecare CFO are here to help with complete bookkeeping, accountancy, and fractional CFO services to help you streamline operations, provide clarity and protect your interests.