| The limited liability company is touted for its tax | | | | paperwork is a dangerous problem when the LLC is |
| flexibility and asset protection benefits. While valid, | | | | attacked. A valid, running business produces |
| single member limited liability companies are ripe for | | | | paperwork. A sham company does not. There are |
| alter ego claims, which means the owner losses the | | | | two particular areas where this is a problem. |
| asset protection benefit and becomes personally liable | | | | The first document is the Operating Agreement. Many |
| for the debts of the company. | | | | people set up single member LLCs through cheap |
| Let’s start with the basics. What is a single | | | | online services. They get a nice fake leather book, the |
| member LLC? Well, the person that has an ownership | | | | articles of organization stamped by the secretary of |
| interest in an LLC is called a member. This is the | | | | state and then a bunch of forms. They don’t fill out |
| equivalent of a shareholder in a corporation. As the | | | | the forms and, in many cases, the forms are not |
| name implies, a single member LLC is a company that | | | | applicable to their single member entity. When the |
| has only one owner. It is legally viable and protects that | | | | corporate book has to be produced during a lawsuit, it |
| owner from the debts of the company, but many | | | | is a disaster. Instead of helping prove the legitimacy of |
| owners are waiving this protection because of | | | | the LLC, it helps the plaintiff prove the company is a |
| something known as alter ego. | | | | sham! |
| The asset protection provided by an LLC is based on | | | | The second problem area is the lack of minutes. |
| a legal fiction. Under the law, the LLC is treated as a | | | | Technically, an LLC is not required to have minutes. |
| physical purpose independent of the member owner. | | | | Let’s be clear, however. It should. Keeping minutes |
| As long as this separation is maintained, the debts and | | | | regarding significant business events is evidence of a |
| obligations of the LLC do not pass through to the | | | | legitimate, functioning business. A company that has no |
| member owner. Many single member LLCs, however, | | | | such minutes is evidence of a business entity that |
| don’t maintain this separation. Instead, the | | | | might be a scam. |
| companies appear to be shams. When a judge makes | | | | If you are the member owner of or considering |
| such a determination, the protections of the company | | | | forming a single member LLC, it is critical that you treat |
| are set aside and the member owner is exposed. | | | | it as a legitimate business. Get a valid Operating |
| The number one problem most LLCs have is the | | | | Agreement created and minutes so that you don’t |
| paperwork. You have probably read that LLCs are | | | | run into a situation where the entity is set aside and |
| great for small businesses because they require little | | | | your personal assets [home, stock, savings] are |
| paperwork. While technically true, the lack of | | | | exposed. |