Forming a Single Member LLC? Read this first…

If you have started an online business (or are thinking about starting an online business), then chances are that you have also looked into how to create a single member LLC.

What is a single member LLC?

A “single member LLC”, is simply an LLC where you are the one and only owner (or member) of the company.

LLC stands for Limited Liability Company, and as the name suggests, one of the main reasons they are formed is to provide the owner with “limited liability” protection against being held liable for the debts and creditors of the company.

This means that the creditors of your company can’t come after your personal assets (home, car, bank accounts, etc.) to satisfy any claims they may have against your LLC.

What most people don’t understand, however, is that by merely filling out and filing your Articles of Organization with your local secretary of state’s office, you are not automatically insulated from these claims.

There’s more to it than that, believe it or not.

There are a few more steps that you have to take to adequately protect your online business, and yourself personally, when you are forming your single member LLC.

Here are some of the things you need to do to eliminate the risks of a creditor or plaintiff reaching your assets as the sole owner of a single member LLC.

No time to read? Here is a quick video I prepared on Single Member LLC's as well…

You Need to Keep Your Legal Business Separate from Your Personal Stuff

The “Alter Ego” Doctrine basically says that if there is no distinction or separation between you personally and the business, then the corporate veil can be pierced.

That sounds complicated doesn’t it? It’s not really. Let’s take a closer look.

What is a corporate veil?

Think of the corporate veil as the bubble that covers all your personal assets. If it is pierced (i.e. if there is no separation between you and your business), than there is no more protection for you personally from anyone that sues your business.

So how do we know if there is a separation or not?

There are a couple of factors to be considered.

Do You have a proper Operating Agreement in Place?

If you sign up to get your LLC from one of those online form repositories (you know who I’m talking about), chances are they won’t give you an operating agreement at all, or the one they will give you is woefully inadequate.

I know this because I’ve seen these with my own clients – and am actually in the process of amending one right now.

What should you put in your operating agreement to make it rock solid?

You will want to outline the duties and responsibilities of each member. Remember, this is an “operating document”, that means that it should tell you everything you need to know about how you plan to run your single member LLC.

Included in this plan is an outline of how everyone will be paid. Are you going to take a salary once a month? What if there is excess cash? What if there is not enough money to pay everyone? How will you plan for taxes? You need to outline how all of this will happen.

(As an aside, I HIGHLY recommend that you read Profit First by Mike Michalowicz (affiliate link). It’s the book I wish I had 10 years ago when I first started my law firm.)

You can also include how you will make decisions on where to invest the money from the company, bonus payments, and how you will decide whether to add new members to the company one day.

Basically, anything that has anything to do with running your business should be in this agreement.

You should act like you are a multi-member LLC when you draft this agreement, even though you aren’t.

Maintain proper records, notes and meeting minutes regarding major financial decisions

Decide that you want to invest in a new computer or piece of software? You want to have a meeting with yourself to document that.

Sound silly? It is, but it will protect you in the long run.

So basically, anytime you are making a major decision for your company (i.e. I’m considering investing into a new marketing software right now, this should be documented in my corporate “minutes”) you need to have a record of this, signed by you as the owner member.

Make sure that your LLC is properly capitalized

This is just a fancy way for us lawyers to say that you have enough cash in the bank to pay your bills, and plan for a rainy day.

If you take all of your money out of the LLC every month, then it looks less and less like the LLC is separate and distinct from you personally.

Avoid commingling funds

Commingling funds is where you have to pay bills for the business, but you don’t have enough money to pay them. So you just pay them out of your personal checking account.

Or vice-versa.

To keep everything separate, you want to make sure all the business bills are paid out of the business. You want to pay your personal bills out of your personal funds.

If there isn’t enough in one or the other, then write yourself (or your business) a check and then pay the bills out of the appropriate account.

Sign your documents properly, especially ones that bind your LLC

Whenever you are signing a document that “binds” the business, you want to make sure that you sign that document in your capacity as the owner. So instead of just signing your name, you will list the name of the business, and then on the signature line you will write “BY: /s/Jane Smith, Owner”

Always make sure to include the name of the business, and write out your capacity as owner, member, etc. on the line that you sign.

This will make it clear that you are binding the company, not yourself personally.

So What’s the verdict on Single Member LLC’s?

Single Member LLC’s are a great vehicle for a startup business. Just make sure that you follow all the corporate formalities and treat your business just as you would if you had multiple partners.