LLC Formation:  See You in Court and Check Your Personal Assets at the Door

By Katherine Charapich

Open for Business!  The sign, when it graces the brick and mortar storefronts lining a community, or is virtually hung on the website of a local business, is an indicator of healthy commerce.  The variables of healthy commerce also include laws that promote local business, favorable tax structures, products and services useful to a community, and a business foundation that protects the efforts of the business owner.

If an owner of a small business has the vision, the courage, and the perseverance to step out in faith and establish a business in a community, she should have confidence that there are systems in place to empower that effort. Trusting that those who write our laws and tax code will do the right thing, consider the statement above a call-to-action – that small businesses endorsed during an election cycle are supported.  The following focuses on the foundation of the small business itself, and its succession – a building block of estate planning.

Though our business main street seems to be advancing in directions that promote opportunity that perhaps even a decade ago could not have been envisioned, the need for fundamental structures of good business remain essential.

Whether a community’s main street consists of brick and mortar businesses or an online presence, each is in need of a solid foundation.  In addition to offering a product or service that is sought after by consumers, the planning stage of an effective business model goes far beyond hanging a shingle.  A business should become a formal entity.  A consideration of identifying an entity that works well for a business is the protection against liability – constructing a wall that makes it very challenging for someone to reach over and into personal assets.

If you anticipate your business as being part of the stream of commerce by offering a product, or if you are providing a professional service, protect your interests – protect your assets.

Consider forming a limited liability company, better known as an LLC. The laws that govern LLCs are set forth in § 13.1-1000 et seq. of the Code of Virginia. LLCs are considered a hybrid between a “partnership” and a corporation. An LLC provides the benefits of limited liability, as well as pass-thru taxation.

There are some who, when considering the formation of an entity such as an LLC, take a wrong turn at this point in the decision making process.  At first glance the purchase of an insurance policy seems sufficient, and they don’t pursue a formal entity.  Purchasing insurance is an essential element to have in place when running a business; however, it does not take the place of a formal entity.  It is the properly established entity that helps provide the protection against personal liability.

As a business owner, a goal is to provide the best product and service within the four walls of your business, and not provide a window or door into your personal assets.  For example, there are many “mom and pop” businesses that sell consumable goods, and they have no entity protection.  A common, and very exposed approach is, “We have always done business this way, and we only sell to family and friends.” Unfortunately, they are family and friends, until they’re not.

Let me present you with a hypothetical scenario of when such an approach can go wrong – very wrong.  The business has been run successfully for years, and the owners now have quite a bit of land, and savings for a rainy day.  The business raises livestock, and sends the livestock to a plant, which processes, packages, and mails the end product to the consumer.  During the processing of an order, a chemical got mixed into the meat, and the infected meat was placed into the chain of distribution.  A friend takes very ill.  The tide shifts; the former friend is now a victim. Your former friend’s attorney is looking for answers.  What protections did you have in place so that it is just the processing plant and not you, that answers for its negligence?  Did you have a contract in place with the plant?  Did you have a contract in place with the consumer?  Did you give a personal guarantee?  Better question – was it your LLC that had contracts in place with all of the parties, so when you are standing in Court, which you would be, it is on behalf of your entity within its four walls, and not in your personal capacity with all of your personal assets of land and savings in tow?

If you are establishing a business, put protections in place.  The steps of forming an LLC include, but are not limited to, submitting Articles of Organization to the State Corporation Commission (SCC), applying for a Federal Employee Identification Number (FEIN), opening a business checking account, and executing a well-drafted Operating Agreement – that addresses management and succession planning.

As a small business owner, the manner in which we run our business takes on a personality and in some aspects defines us. Characteristics of a well-formed LLC include, but are not limited to, uniqueness of name and branding, a solid/visionary business plan, a well-drafted operating agreement, and a team of trusted professionals – legal counsel, CPA, financial advisor, and insurance provider.

As I have learned, those characteristics are ever so important, yet success in business reaches far beyond those elements – “Commit to the Lord whatever you do and your plans will succeed.”  Proverbs 16:3 (NIV)