How to Make Sure Your LLC Actually Protects You

You can lose your LLC protection without even realizing it. Most business owners think once they form an LLC, they're protected. They file the paperwork, pay the fee, got the confirmation from the state. They think, I'm good. But here's the truth. That's only one part of the process because I've seen it happen over and over again. Business owners who thought they were protected lose everything because they didn't maintain their company properly. I'm Mark J. Kohler, CPA, attorney, and small business advocate. And in this video, I'm going to show you why your LLC might not actually protect you, the simple compliance mistakes that can destroy it and the habits you need to follow to keep all of that protection intact. Let's break it down. Filing the LLC is just the beginning. One of the biggest myths out there is that an LLC is just one sheet of paper. And notice how I use the word filing because the actual formation of the LLC includes a lot of other documents that go with the state filing. Yes, you need to file with the state, sometimes pay upwards of a couple hundred bucks, and boom, you may think you're protected forever. That's not how it works. A real LLC has multiple parts when it's formed properly. Not only do you have the articles, you have an operating agreement, initial minutes with a host of resolutions that have to be adopted, a corporate book, membership certificates, and then signed properly by everyone involved. We're not even to the ongoing documentation and maintenance that comes on day 2. So if you don't have those pieces when you initially form the LLC, Right out of the gate, you don't have the protection you think you do. And here's the scary part. An attorney or the IRS under an audit know exactly what to look for. So if you cut corners with this initial process, your LLC can be completely ignored in a lawsuit or in an audit. Why does this matter? What are we trying to accomplish here? Well, there's several things actually. It's not just asset protection, which is obvious. We're trying to protect our personal assets, our home or investments or savings from a, potential lawsuit from the business operations of that LLC, but we're also trying to create a brand. We're trying to protect a name. We're going to invest a lot of time, money, and effort into this company, and if we don't set up that LLC properly, we may not even lock down the name for the future branding we're going to do. Third, we've got tax strategies we want to take advantage of. When you form an LLC, there has to be resolutions in those initial minutes to be able to write off our home office, to write off auto mileage, to, to get reimbursed from the company and make it a tax write-off and tax-free to you. And the list goes on and on. The LLC is a separate entity from you. It needs to have its own bank account and its own set of books. And that's just the beginning of the tax strategies. Number 4, we might have relationships inside this LLC to protect us from the actions of our partners or managers or employees. That's what an operating agreement does. It sets the guidelines or the rules or the Bible, if you will, of how this business is going to operate so that you're not liable for your partner's actions even family members or again, employees or officers, managers that are helping run the company. And one more, what is our exit strategy? We're trying to create a company that we hopefully can take to market at some point in the future. We're trying to create that brand, that value, that asset that is all bundled up in that LLC. If we're cutting corners on the structure of the LLC, then how are we going to be able to sell this thing down the road if we don't respect the LLC to begin with? And frankly, that's just the beginning of the things an LLC can accomplish for you. And before we go on, let's think about the flip side of what this LLC may be doing for you. Sometimes the LLC is there to protect you from the operations of the company. You want to protect your personal assets from something that could go wrong in the business. Or the other side of the equation is you could be setting up an LLC to protect an asset from you. Some important asset like a cabin, a second home, cryptocurrency investments, real estate. That you want to protect from you getting into a lawsuit, texting and driving or some other problem. See, an LLC could be creating outside protection or it could be creating inside protection. Now let's talk about a real-world scenario nobody really thinks about. And I've lived this in court. Let me give you a quick example. You've got an LLC, maybe you've had it for a couple of years, but you've missed doing the annual filing. You haven't done your minutes. Your records are a mess. You don't have a separate checkbook. You barely use the company name and you don't sign for it properly as the manager of the company. You basically have that one sheet of paper in the drawer and thinking the LLC is really serving you. Now you go to apply for a loan, you're audited by the IRS, or worse, there's a lawsuit, and suddenly the bank can't verify your company status. Attorneys start asking for information, it's called discovery, and what do they find? Nothing. No documentation, no compliance, no separation. And at that point, your LLC is just a meaningless piece of paper. But I don't want that to happen to you. So let's assume you set it up properly and you have the best of intentions, and you start down the road. What are some of the most common mistakes business owners make that I want you to avoid? And let's list these out directly because these are the ones that get people in trouble. First, they ignore annual filings. In most states, your company has to file annually to keep it in good standing, pay a fee, file a piece of paper online or in the mail. Most states require a yearly renewal, and if you miss it, your LLC can be what's called involuntarily dissolved, suspended, and stripped of its legal status essentially. And here's the kicker, you may not even realize it happened. Second problem, not keeping annual minutes or good records. Now I don't care what someone told you, you need to do minutes. Oh, you want to argue with me? Like, Mark, LLCs don't have to do minutes. You know what? Okay, yeah, you don't have to floss either, right? But what do 4 out of 5 dentists tell you? What do you know is going to prevent cavities and tooth decay? Flossing. Well, wait until you get into a lawsuit and your attorney goes, hey, can you bring in your corporate book and minutes? Well, I didn't think I had to. Yeah, you don't have to, but you sure damn well better or else you're going to be hosed. It's one of those need to do things. We don't want to just do things because we have to. We want to make decisions that help us elevate, scale, and create real protection. The minutes are actually a great tax write-off. Many of you know I've been preaching this for years. I love the annual board meeting with your friends or family. This is where you go to take a tax write-off. Talk about the business, talk about the future. You'd write down what decisions were made, how the business operated, and you're going to be again making special resolutions for tax planning. Without them, you look like you never even had a real company. Third mistake, mixing personal and business activity. It's called commingling. This is one of the fastest ways to lose protection. So if you're using the same bank account for your personal life and your business, pshh, game over. Not a good move. And I think all of you know that. Now, is it going to happen once in a while? You're at Costco and you need to pick up something for your business, so you write a personal check and buy it. And you want to reimburse yourself and write it off. Sure, that's fine if it's once in a while, but you've got to respect that separate accounting as much as possible on a daily, weekly, monthly basis. One of the other big ones is just not even signing contracts in the name of the business, signing them personally, signing up for online accounts in your personal name, not the company name. Think about the lease agreement on your rental property title. And frankly, do not worry about transferring title from the property into the LLC. Oh, there's a due-on-sale clause with the mortgage. People, we've transferred thousands, tens of thousands of titles into LLCs after closing, and the banks don't care. You're still on the hook personally for the mortgage. It's just the title is held by the LLC for asset protection. So do not worry about moving title after closing. If your business isn't run by the LLC, but your individual name, then it isn't separate. Now your LLC is useless. And I guess finally is treating the LLC casually. This is a big one. Don't treat your LLC like it's a side note. The legal system will too. You have to treat it like a real business because that's what it is. Use the logo, use the company name, use your name as manager, use the company checkbook, put it on everything. You just work for the company. Everybody should know the name of your company. So that it protects you. Don't hide from it. Now, here are the simple habits to protect you. And this is the good news. It isn't that complicated. You just need a system and good habits. Here's what to look for. Are you current with your state filings? Are you doing your annual minutes? Do you have clean records and documentation? Do you maintain a separate bank account? Do you run all business activity through the LLC? People, this is not cost thousands of dollars. It's just you learning how to operate the company properly. Our fee at Main Street Business Services to do your minutes and maintain everything is $200 a year. $200 a year to make sure it's all taken care of. And we give you a list of what to cover in your annual meeting. Now, if you're an S corporation, you're going to want to stay on top of the payroll and some of the extra tax forms. Now, of course, you're doing that anyway because it's going to save you a ton in taxes. Now, I know I start to sound dramatic, but I'm trying to emphasize how easy it really is to maintain these simple habits and they make all the difference. Now I want to also give you another recommendation, warning. Where you set up your LLC is almost as important as how you set it up and maintain it. 'Cause if you set it up in the wrong place, it's not going to give you protection either. Let's do a couple examples. Let's say you're going to buy a rental property in Georgia and you live in Ohio. Okay, well, do I need an Ohio LLC for that? No, I need an LLC in Georgia. Now I could set up an Ohio LLC and register it foreign in Georgia, but now I'm paying for a fee in Ohio and a fee in Georgia, and all I'm doing is using it in Georgia. In those situations, I would just set up a Georgia LLC to begin with. You also need to have a registered agent address in Georgia, and you may want some privacy having mail forwarding, kind of a virtual mailbox so that your address isn't everywhere. Also important considerations. But at the heart of the issue, you need that LLC set up where you're doing business. So if the rental property's in Georgia, Georgia LLC. Let's stay with the example and say you're in Cleveland, Ohio, and you also are a realtor, you're a broker, and you're hitting the road every day doing work as a real estate professional. You're doing business in Ohio. Would that Georgia LLC do me any good? No. And its purpose is to hold the real estate anyway. But in Ohio, you have an operational business. So you're going to set up an entity in Ohio because that's where you're doing business. We're also going to have to be thinking about our tax strategy Because when you create ordinary income with an operational business, it's very different than a rental property. This is where the S corporation comes in. So my takeaway here is that an LLC can be taxed like an S corp. We charge a couple hundred bucks to make that election, very efficient, very affordable. But you start out as an LLC in Ohio in that example again, and then we can convert it to an S corp with just a couple pages on a Form 2553. So now I get the benefits of the tax strategy of the S corporation with the foundation being an LLC. Nothing wrong with that. But again, where do we set it up? Where you're doing business. Now, right there, you may not have even realized it, but I began to explain to you what the trifecta is. A trifecta is a way of looking at your overall structure to make sure it's done properly. In this example, I wanted the holdings on the right-hand side where the rental property is with the proper LLC in the state where the rental is. And then on the left side, I have my operations. That's or I'm going to have my LLC that'll eventually be taxed as an S corporation. Both of those would be owned by my revocable living trust. The last leg of the stool, the trifecta, holdings, operations, trust. Now I'm getting the benefits of 3 types of structures and it makes sense and it's organized. So the moral of the story is if I want this LLC to be this protector for me, I've got to not only set it up properly, maintain it correctly, but set it up in the right place. And when I set it up in the right place, I'm going to make sure the ownership and structure brings it all together. So let's talk about the big takeaway. An LLC is not a magic shield. It's a tool. And like any tool, it only works if you use it correctly. So if you ignore the formation or the compliance and just get sucked into this Wyoming LLC conversation without understanding why I might be doing that, you just weaken your protection. And in fact, you can eliminate it. So if you've already set up an LLC or you're thinking about it, now is the time to make sure it's actually working for you. Because the difference between doing this right and doing it wrong could be everything you've built. So if you want to make sure your LLC was set up properly or you're coming out of the gate and want it structured correctly with your trifecta and that trust structure, then please call the law firm KKOS Lawyers. This boutique law firm was formed by me and Matt Sorenson over 20 years ago. To help clients all over the country in any state get affordable tax law advice, talking to a real lawyer on a Zoom call, a phone call, whatever you want to help you do it right. Now, once you have your entity, and many of you already do, it's about maintenance, making sure the annual meeting's done properly, you have all the right resolutions, and you've got those habits that give you all that protection. That's our sister company, Main Street Business Services. Here we've been doing minutes for companies for over 15 years, doing all the little things to make sure your entity stays in compliance with the state, and you're doing all the proper paperwork simply and affordably. The links to both of those companies are down below, and we work together. Our teams help our business owners stay compliant, organized, and protected without the stress of managing it all yourself. Don't let this simple but yet extremely important process in the building of your American dream be ignored. This can be a silent killer for so many business owners, but it can also be an outward-facing example of a proper business owner and their structure that people want to rely on. If you found this helpful, hit the like button, subscribe, and turn on the notifications so you don't miss future videos. I'm Mark J. Kohler. Thanks for watching, and I'll see you in the next one.