I want to open a small business as a limited liability company so that I can protect my personal assets and have a separate bank account for my business. What steps do I need to take to make this happen?
"This is a straightforward question. So beyond establishing a business model and accumulating startup capital, consideration of one’s personal liability when starting a new business is not only a smart thing to do but quite necessary as well."
What sort of protections do limited liability companies provide to its owners?
"These entities provide a distinction between the company’s assets and the personal assets of the company’s owners. Owners arena’t on the hook to pay for company debts in the absence of personal guarantees. So a creditor can go after the assets of the company but a creditor cannot seize the assets of the company’s owners to satisfy any debts."
Is it difficult to obtain or start a limited liability company?
"Not at all. Limited liability companies are state-recognized business entities. Each state has its own laws that grant owners “limited liability” for the debts or liabilities of the company. Owners have to file a document that is called an “Articles of Organization” with the secretary of state. All that a prospective owner needs to do is file an acceptable Articles of Organization and a filing fee to be recognized as a limited liability company."
Once the company is recognized by the state, can the owners then open the company’s bank account?
"Not quite yet. Banks have their own requirements. Banks require a tax identification number. The limited liability company will have to file an application with the IRS. Most banks are also going to require the limited liability company to produce an operating agreement before opening up the bank account."
What’s an operating agreement?
"The limited liability company’s chief governing document. It’s generally going to establish the identity of the company’s owners, voting rights, managerial duties, and all the other rights and privileges of the company’s owners. Operating agreements also assist in preventing courts from doing what’s called piercing the corporate veil."
What does piercing the corporate veil mean?
"Courts can actually pierce through the veil of that liability protection and hold the limited liability company’s owners personally liable for the company’s debts or judgments. Undercapitalized company, acting as an alter ego of its owners, or if the owners fail to observe corporate formalities. Having an operating agreement in place is one way of showing courts that the owners are observing corporate formalities by operating the business as a legitimate limited liability company."