Business Planning: When a LLC Is Not Enough
By: Barry E. Haimo, Esq.
May 14, 2015
There are a number of reasons why people decide to create limited liability companies, or LLCs. They can make you seem more credible as a business. Your management structure can remain incredibly flexible, either governed by all partners or enjoying centralized management like a corporation. You, as an owner, cannot be held personally responsible for the debts of the business, which insulates and isolates you from creditors coming after your personal assets. In addition, instead of paying business taxes as a separate entity, they are “passed through” or “flowed through” to the owners of the LLC and paid as personal income taxes.
All of these are valid reasons for creating an LLC, but the reason that people most often cite is in the name itself – “limited liability.” By forming an LLC, they believe that they are protecting themselves from getting sued personally or personally facing other legal troubles that might arise when running a business.
Now most people know that this protection doesn’t cover you if you engage in fraud or other illegal activities with your business – break the law and you can absolutely be held accountable, financially and otherwise. But what they don’t know is that there are a number of other ways that your creditors can get around your LLC protections: by signing documents personally instead of as a company representative, personally guaranteeing company debt, or, as Mark Fellman painfully discovered, when you are the sole shareholder or “member” of an LLC.
If You’re Alone in Florida, Your LLC Can Be Taken Away
Growing up in South Florida, Mark Fellman always wanted to be a renowned comic book artist. He was constantly drawing in notebooks, and even sent his work in to DC, Marvel, and some of the other smaller companies in hopes of getting a job.
But he never heard back and was about to give up hope when he decided to start a blog and post his art there. It was mostly a way to keep himself motivated, so he was surprised when he started receiving comments from people saying that they loved his work and “would totally wear it if he put it on a t-shirt or something.”
Mark had never considered this but thought it was worth trying. He used an online t-shirt company that allowed him to upload his design and started taking orders. At first, he only had a few each week, but it was enough to give him hope. He started opening shops on Etsy and other places, and it wasn’t long before he was making enough for the t-shirts to make it his full-time job.
But the orders were coming in faster than he could fill them. Since he noticed that there were a high percentage of local customers, he decided to get a physical storefront. Business boomed, but Mark wasn’t the most organized person. It wasn’t long before creditors came after him for failing to pay. Luckily, it was mere forgetfulness, and he was able to take care of the situation. However, Mark decided that he needed to do something to protect himself financially.
He read up on LLCs and thought that an LLC sounded like the way to go. Then he just went online, filled out a cheap and simple form, and sent in the appropriate paperwork. It was shockingly easy, and he got a great deal.
Buoyed by his ever-increasing success, Mark took out loans to open more stores and increase his inventory. Unfortunately, he overextended himself, and this time he really couldn’t cover the costs – at least not right away. He tried to explain to the creditors that his new stores needed time to catch on with customers, but they weren’t interested – they wanted their money now.
Mark was frustrated but not scared – after all, he was personally protected by his LLC… or so he thought. Then Mark got a notification that the creditors had filed a complaint against him and his company. In other words, they were coming after him with the intent of taking his company – and his designs away. Angry, he called the creditors and told them that they couldn’t do that because his organization was an LLC – he was protected!
The creditors’ attorney calmly educated him – he was wrong. While some LLCs did not offer that kind of protection, his did not. Mark didn’t understand. How could his LLC be different? Weren’t all LLCs the same?
Mark was told no. Because he was the only shareholder or “member” in his LLC, Florida law didn’t protect him from having his business taken away. It only protected multi-member LLC interests. Consequently, Florida law did not grant him that protection.
He fought hard, but ultimately ended up losing his business to his various creditors, who promptly liquidated its assets to pay his debts. Mark was emotionally and financially devastated, and it took him several years to get his life back together and open a new company. Luckily, he learned from his previous mistakes and hired a lawyer to set up his LLC. The right type of entity with the right governing documents go a long way and are worth the investment. It was a tough, tough lesson to go through – and one that could have been avoided.
Before Forming an LLC in Florida, Speak with a Knowledgeable Estate and Business Planning Attorney
If Mark had gone to a lawyer who practices law in this area to form his LLC initially, it would have cost him more upfront money than he paid through the website where he found the cookie-cutter forms. However, a good business planning attorney would have been able to tell him about the dangerous vulnerabilities presented by Florida LLC laws that ultimately cost him so much more. He learned that the advice to structure his business properly was well worth the investment.
In my time helping clients create business structures, I’ve witnessed all kinds of crazy things, including a person who was sued for the picayune reason that he signed a document without including his business title. In other words, he signed “personally.” Before the issue came up, no one had even told him that this could be a problem, but it was almost a disaster for his business. Luckily, we were able to avert it, but that’s a situation you never encounter in the first place.
Want to learn more about what type of business entity is right for you and your business and what you can do to protect your assets? Give us a call today and we’ll set up a consultation.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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