5 Ways to Keep Your LLC’s Liability Protection Strong – Dayna Thomas Cook, Esq.

Forming an LLC does not guarantee that your personal liability is protected on all sides. In fact, there are limited circumstances where a business’s liability shield can be pierced, known as piercing the corporate veil. Understanding the circumstances where this can happen and how to prevent them should be a top priority for every small business owner and entrepreneur.

On today’s show, we’re discussing five ways to keep your LLC’s liability protection strong with Dayna Thomas Cook, Esq., entrepreneurship and entertainment attorney at the Law Offices of Dayna Thomas. Dayna is also the best-selling author of Entrepreneur’s Guide to Building a Solid Legal Foundation.

TRANSCRIPTION:

Jim Fitzpatrick :
Thank you so much for joining us once again, Dayna.

Dayna Thomas :
Awesome. I love being here and sharing tips and tools and strategies with the audience so we can help them build the best businesses possible.

Jim Fitzpatrick :
Sure, sure. So, let’s jump right in here. What’s the first thing business owners and entrepreneurs need to understand about keeping their liability protection strong?

Dayna Thomas :
Okay, awesome. So Jim, I’m going to talk about five things, but I want to introduce it by saying that the overall goal with everything that I’m going to talk about is to treat your business as a separate person from you, right? It’s an entity, but really think about it as separate from you. Right? And so, number one, the first thing that we want to do we’ve mentioned is actually form a business entity, right? I think that a lot of folks may think that just adding LLC to their name or just opt to create a business under a different business name will give you some type of protection.

Dayna Thomas :
It will not do anything unless you actually file your documents, your LLC documents or other entity with the Secretary of State. In most states, it is the Secretary of State. In some other states, it might be another process for that. But file your documents. Not only file them, but keep up with your annual registrations because your state will dissolve your company if you do not keep up with your annual registration. I’ve seen many times Jim, where clients will come to me and I say, “Do you have an LLC?” And they’ll say, “Yeah, I’ve had my LLC for five years.” While we’re talking, I’m looking it up on the Secretary of State, and it was administratively dissolved two years, and they hadn’t [inaudible 00:02:24].

Jim Fitzpatrick :
That’s right. I have been guilty of that myself. A lot of well seasoned entrepreneurs have been guilty of that as well. It just gets by you, and you realize … It’s not something that jumps out every year to say, “I’ve got to renew that.” And it’s interesting you should say that because I just had a conversation with my attorney on this to make sure that every year that’s being done. So it’s an easy thing to overlook, but it’s a very, very important thing that it’s in line. Right?

Dayna Thomas :
Very easy to forget, especially since normally it’s once a year.

Jim Fitzpatrick :
That’s right.

Dayna Thomas :
Know for sure. So let’s jump into number two. Number two, an operating agreement. Right? So an operating agreement is essentially a contract between the owners of a business about how you will run that business. Now, I will say this. In the state of Georgia, as well as in most other states, there is a default law. There’s default laws that LLCs and companies can fall back on if you do not have an operating agreement. However, I would not recommend relying on that because it may not be the way that you want to run your business. And proactively, if you have an operating agreement, it just shows that you are really treating your business like a business, not just making decisions on a whim. Right? But not only have an operating agreement, but follow it. Right? Your operating agreement will say how you make decisions. Whether you need to have a vote about it, whether you need to write it down, and following that as well.

Jim Fitzpatrick :
Yeah. Yep. There’s no question about it. It’s a common mistake, because people think too, “Well, I’m going to business with my buddy and therefore, why do we need this operating agreement? Why do we need this all spelled out? We know what each one of us is going to do and we bring strengths and weaknesses.” It all sounds very well-intentioned and great. And it’s going to work out that way, but more times than not does it work out so perfect to the point that you don’t need an operating agreement? This is an area that you absolutely have to pay attention to. And I agree with you. It’s a very important document.

Dayna Thomas :
Phenomenal. It’s true because not only is it good for your liability protection, but just like you said, it helps to avoid business disputes. Just go back to the agreement. What did we agree on in the beginning? And you can kind of squash that right there.

Jim Fitzpatrick :
That’s right. That’s right.

Dayna Thomas :
Number three. This one is so important, and it will get you in the most trouble if you don’t do it right. You want to make sure not to commingle funds. Attorney Danya, what does that mean? It means keep a separate bank account for your business and personal assets. This should not be something that you do once you feel like you’ve made enough money to actually separate your business. This needs to be done and have a business bank account before you start collecting money. You really have to have that ready to go for when you take your first dollar, because if you are joining your funds, so your personal funds and your business, then you’re not separating your business at all. So just like money as an asset, so is a liability. If you’re putting your assets together, those liabilities will be together as well. So you have separate business bank accounts.

Jim Fitzpatrick :
Let me ask you this. What if I’m a business owner and out of the business, I write my car payment out of the business checking account, and I make my personal car payment with that?

Dayna Thomas :
That is no good, Jim, because you are paying a personal debt with business funds, right?

Jim Fitzpatrick :
Right.

Dayna Thomas :
It would be a different story, right, if your car was registered in your business name, and you are using that car for business purposes, and your operating agreement gives you the authority to do that. Right? So that’s a different story. But just saying, “You know what? I have more money in my business account than I do on my personal account. I’m just going to pay this, my car note this month or this month, and next month from my business account.” That’s a no-no. Right? You can’t.

Jim Fitzpatrick :
If I were to do something wrong in business and I got sued and they said, well, there’s an LLC. There’s a corporation in place here. So we could only sue for the assets of the company, so to speak. Would the car then become one of them?

Dayna Thomas :
You know what? That’s a common misconception that just because you have an LLC, that means that I’m protected. Right. I formed my LLC. Even though I paid this debt out of these other funds, it’s okay. No, that is called … the ability to alleviate that protection is called piercing the corporate veil. Right? So everything that we’re talking about today, those are factors, meaning you really want those factors to be on your side.

Dayna Thomas :
There is some leeway with entrepreneurs. You make a mistake here, that you don’t make a consistent. No one is perfect when it comes to business. So I don’t want to discourage anyone. Right. But that’s the reason why we’re having these types of conversations so that you know. Right. So even if you have an LLC and let’s say an operating agreement, but you don’t do anything else, you’re your money’s together. And you know, all the other things that I’m talking about, you can have your corporate veil pierced, meaning we’re cutting right through that liability protection and coming to you as a personal debtor.

Jim Fitzpatrick :
That’s right. And the business owner did it inadvertently not realizing that they are the ones that made that piercing possible, not the creditor or somebody coming after them. It’s actually, they were their own worst enemy and doing that and not understanding you can’t co-mingle, you can’t bring these two separate entities together. Once you do, you marry the two together and they’re all in the court’s eyes seen as one. Right?

Dayna Thomas :
Yup. And that’s the difference between treating it like a business and treating it like a hobby. Right? A lot of times these mistakes happen because it is more convenient just from this account. It’s more convenient just to have one account and not have to have a fee every month. It’s more convenient, but you’re a business owner. We’re not doing this for convenience. We’re doing this so that we can build legacies and things like that.

Jim Fitzpatrick :
And you touched on something earlier, when you said it may start as a side hustle, but then you start to take it serious. Take it serious from day one. Do these things. If you build widgets, do it before you build your first widget. If you clean homes, do this before you clean your first home, because they can also go back if they wish to. Whoever wants to, whether it be a company that comes after you or an employee or whatever, and say, “Well, wait a minute. You actually did co-mingle these things back a year ago or six months ago, what have you.” So we’re going to try to bring those together, right?

Dayna Thomas :
No business is too small to have an LLC, especially in Georgia. The investment is so low, in order to form your LLC. But of course thing on top of those other things, that’s just the first step.

Jim Fitzpatrick :
That’s right. I would also say that for the people that are listening, to the people that are about to make the jump, or maybe have already made the jump. They’re working a side hustle, or they’ve opened up a small business. This to me, and this is my own experience over the last 35 years of being an entrepreneur. This is an area that I would recommend. Don’t leave this to some of the do-it-yourself organizations out there like Legal Zoom or some of the others that might entice you to say, “Along with our help, we can set up your company.” This is something that you want to bring into an attorney like Danya, that you can sit down with to say, “Here’s our objective. Here’s our business. What do you recommend? What’s the structure? Talk to us and help us set up the operating agreement.”

Jim Fitzpatrick :
Don’t try to do this particular element, folks, online because these are very, very important steps. And you want to have an attorney in your corner that actually created and helped you to create these documents so that they know where you’re at. And the fact that they can also then play a big role in defending those documents once they’re put together. Because I’ve seen too many people once they’ve gone to Legal Zoom, then they figure out, “Ut-oh, I made a mistake. Legal Zoom didn’t tell me about it. And now I’ve got to find an attorney to get me out of this mess.” Save yourself the headache and just get with an attorney.

Dayna Thomas :
I just love it. We’re on the same wavelength, because that is so true. How can you build a solid foundation if your very first steps are rocky? You don’t know if you filed it right, and then you’re building assets on top of it. So this LLC that you don’t even know is correct have other assets and liabilities in that name. You want to do it correct. The other thing that you mentioned is attorneys digging you out of trouble. I don’t touch anything that I didn’t do. So there’s a lot of times when it comes to filing their own LLC or filing their own trademark, and they’ll come to me to send a cease and desist letter or something. I don’t feel comfortable doing that because I don’t know how [inaudible 00:10:54] what our rights are.

Jim Fitzpatrick :
Right. You didn’t put them there. Why is it up to you to get them out of there?

Dayna Thomas :
And I don’t even know if the rights are strong enough based on what you did on your own. If I do it, I know it’s right. So I feel comfortable sending those letters, right? Well, that’s a part of building a team.

Jim Fitzpatrick :
Yeah, no question.

Dayna Thomas :
Great point. So number four, right? You want to own your business assets in your business name, especially your intellectual property. And this one is very important to me. It comes up in my business quite a lot because I do have a lot of trademarks. And one of the questions, and this is an example is, should I file my trademark in my business name or my personal name? Because they feel like, “Hey, I came up with this brand. I want to own the trademark to it.” However, your trademark is a business asset. You are using that brand name or that logo to sell products or services under your business.

Dayna Thomas :
So your business needs to own that asset. We can’t just put liabilities in our business name, because we want to be away from liabilities. But then all of our assets are in our personal name because assets help us to make more money. Can’t have to do that. Right? So as you are an entrepreneur, you will have intellectual property. You will have content that you create. You will have brands that you come up with, right? So trademarks, copyrights, things like that should be owned by your business. Not only to protect your liability protection for the things that I mentioned, but there are certain situations that may come up. If someone thinks that you’re infringing on their trademark or they’re infringing on yours, whether it’s a trademark or copyright, and there happens to be some type of litigation, you don’t want your personal self to be a defendant in that lawsuit or even a plaintiff. You want your business to be attached to that because whatever outcome from that, you don’t want them touching your personal assets.

Jim Fitzpatrick :
That’s right. Couldn’t agree more. Number five.

Dayna Thomas :
Yeah. Number five, and this is the flip side of that, right? Putting your liabilities and your business name just like your assets. So more specifically, your contracts, invoices, right? So if someone sends you a contract because you’re doing business together and they put your personal name as a party to that contract, you need to send that contract back and say, “Hey, can you please edit the party to this contract? It’s going to be my business LLC and not me personally.” A question I do get is, “How do I sign that?” So if my business is a party to the contract, do I sign my name? Yes, you do sign your name, but make sure it’s clear that it’s on behalf of the business.

Jim Fitzpatrick :
And a good way to do that, right, Danya is to put whatever your position is. So you might sign it. You know, Jim Fitzpatrick, president, or CEO, if that’s in fact what I am on that company. So that the person that’s got that document knows they’re signing as president of the company, not as Jim Fitzpatrick. Right?

Dayna Thomas :
It needs to be very clear that anywhere your name appears is on behalf of your country, your company, right? And so that just keeps it clear. That keeps it making sure that these invoices, the money that is owed is not owed by you personally, but it’s owed by your business. Again, these are five factors. Right? It’s not an exhaustive list, but overall, if you just maintain in your mind that you want to treat your business like a separate person, you can’t take that person’s money. You can’t do things without that person’s permission, then you should be [inaudible 00:14:23] track.

Jim Fitzpatrick :
It’s an alter ego, right?

Dayna Thomas :
That’s what we call it. Your alter ego.

Jim Fitzpatrick :
That’s right. That’s right. And it should be dealt with that way in every single aspect of opening up a business and for those entrepreneurs and those wantrepreneurs out there that are ready to make the first step. Now is the time to call Danya Thomas Cook, because she knows what she’s talking about. And if it’s not Danya Thomas Cook, call somebody that is an attorney and that specializes in this area. Because if you go to an attorney that his last or her last 400 cases were DUI and traffic, you’re with the wrong attorney. Okay? Because they’re going to be going through it at your expense and finding out things and learning things. All attorneys are not created equal, and they don’t know everything about everything.

Jim Fitzpatrick :
Look for those attorneys that specialize in this field. It’s why we love having you on Danya, because you get it. You get entrepreneurship, you get all that goes into the trademark law and LLCs and such. And every time you’re on, we get so many great comments that we need to bring you back on because entrepreneurs are out there with these questions that are specific to opening up a business. So I that’s my advice to the small business owners out there. Get the specialists in that area. Conversely, if you happen to get a DUI, don’t go to a small business attorney, because they don’t know that area either. Go to the ones that specialize. If you have a problem with your heart, you don’t go to an oncologist and say here. They’re going to say, “I specialize in cancers.” Well, the same happens in the legal profession as well.

Jim Fitzpatrick :
I want to thank you so much for joining us on the show. I wish I could spend all day because we have a whole list of things to get to here. But there are a lot of people out there that are on the sidelines as you know, Danya, right now going through COVID and working from home and then realizing, wow, I can really … many cases I can leave my full-time job and be a consultant and do this for a lot of other companies. And when you do that, start that company start, that brand, start because otherwise to Danya’s point, you are now working as an individual and you’re putting yourself out there if you don’t take these necessary steps to protect yourself.

Jim Fitzpatrick :
Again, I want to thank you so much for joining us. Danya Thomas Cook, who is the chief attorney at the Law Center or the Law Office, I should say of Danya Thomas. She’s a great business coach, a best-selling author and all around good person. And so thank you so much for joining us. Really appreciate it.

Dayna Thomas :
Awesome. So glad to be here. I have more coming.

Jim Fitzpatrick :
Great.

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