While LLCs are flexible and relatively easy to maintain compared to corporations, certain legal formalities must be observed to ensure that liability protection remains intact:
Here are the essential steps to keeping your LLC’s liability protection strong:
1. Maintain Separate Bank Accounts and Financial Records
One of the foundational rules of protecting your LLC is keeping business and personal finances completely separate. This means:
- Opening a dedicated business checking account
- Using that account exclusively for business income and expenses
- Keeping thorough and accurate bookkeeping records
When your financials are blurred, it becomes harder to prove the LLC is truly a separate entity, which puts your protection at risk.
2. Execute Contracts in the Name of the LLC
Always sign leases, contracts, service agreements, and any other legal documents in the name of the LLC—not your personal name. This helps reinforce the LLC as a separate legal entity.
For example, instead of signing “John Smith,” you should sign “John Smith, Manager of XYZ LLC.” This small distinction makes a big legal difference.
3. Avoid Commingling Funds
Mixing personal and business money is one of the fastest ways to lose your LLC’s liability shield. Examples of commingling include:
- Using business funds to pay for personal expenses
- Depositing personal income into your business account
- Transferring money between personal and business accounts without clear documentation
If a court sees that there’s no real distinction between you and the LLC, it may “pierce the corporate veil” and hold you personally responsible for business debts.
4. File Annual Reports and Pay State Fees (Business Compliance)
Most states require LLCs to file annual or biennial reports and pay a corresponding fee. These reports typically confirm basic information about your business, such as your address, registered agent, and members.
Failing to file on time or ignoring these requirements could result in penalties, late fees, or even administrative dissolution of your LLC—meaning the state no longer recognizes your LLC as valid.
5. Keep Internal Records and Hold Member Meetings (Even if Not Required)
This is commonly know as business compliance. While most states don’t require LLCs to hold annual meetings or record minutes like corporations do, it’s still a good idea to document major decisions. This includes:
- Admitting new members
- Taking on large debts or investments
- Buying or selling significant assets
Keeping these records shows that you’re treating the LLC like a real business and not just a personal extension of yourself.
Why This All Matters: Veil Piercing Risk
If you fail to observe these formalities, courts may apply a legal concept called “veil piercing.”This means they can disregard your LLC’s liability protection and hold you personally liable for the company’s debts and obligations.
Veil piercing is rare—but it does happen, especially when business owners treat the LLC like a personal bank account or ignore legal obligations.