⇥ LLCs are a good idea, but you can still get sued

On his blog, Joe Stump says that opening your own limited liability company (LLC) is a great way to protect yourself and your assets from unwanted legal attention when you segregate your side projects into it.

He is, of course, absolutely right. An LLC creates a separate legal person for third parties to enter into agreement with without all the complexities of owning and running a corporation. If one of those third parties decides to sue, they’ll have to initiate legal action against the LLC, protecting you and your assets.

If you do decide to open an LLC, however, there are a few things that you need to be aware of.

Note: I am not a lawyer, so take these notes as very high-level and not necessarily accurate. If you are a lawyer and spot inaccuracies, please comment so that I can take care of them.

1. The LLC is a separate person

If someone decides to sue your LLC, they will at least try to get to you personally. After all, the legal fiction of corporate personhood exists specifically to create a cushion between you and the LLC’s liabilities. The process of “getting to you” is called “piercing the corporate veil”—that is, getting a court to look beyond the fiction of corporate personhood to get to the person behind the curtain.

Piercing the corporate veil is a very difficult thing to do (as it should be), provided that you treat the LLC as a separate person.

In practice, this means that you must conduct the affairs of the LLC separately from yours, establishing that, when you are acting on behalf of the LLC, you do so in the LLC’s best interest as it is your fiduciary duty. This means taking care of a few formalities, like keeping your business license current, opening separate bank accounts and, especially, avoiding commingling your personal funds with the company’s. It also means that you cannot use the company as a shield to commit fraud, and so on, and so forth.

So, no treating the LLC as your personal piggy bank. Make sure you record all financial transactions, and always act in the best interest of the LLC, and not your own.

2. Get a lawyer

Lawyers are expensive. There is no way around that. However, unless you are a lawyer, it’s best if you leave the formation of your LLC to one, instead of using one of these rubber-stamp services that are available over the Internet.

There are a couple of reasons for this. First, unlike a service, the lawyer will be able to offer you some advice on whether an LLC is the right thing for you, as well as give you some basic guidance on how to ensure that you run the LLC properly. Second, should you ever get in front of a judge, it looks good if you show that you make it a practice to refer legal works to those who are expert in the field, rather than taking matters into your own hands, not to mention that, if the lawyer screws up, you can go after his or her insurance.

Oh, a final piece of advice: I often hear people complain about lawyers as if they were the scum of the Universe—they’re ignorant, lazy, stupid, greedy, evil… take your pick. That is, in my experience, the best way to ensure that the relationship with your lawyer will be unproductive and expensive.

Lawyers are experts in the law—a field that is often illogical and difficult to understand for the lay person. Which, incidentally, is exactly what non-techies say of programming. So, find a lawyer you can work with and make sure that your relationship is based on mutual respect.

3. Get an accountant

The LLC is a separate person, which means that it needs to file its own tax return. Even if you think you can file it yourself, it’s always best to get an accountant—once again, the reason is simple: what best way to act in the interest of the LLC than getting a third party to validate all the financial data?

That’s not to say that you need an audit, but it’s always good to get a CPA to double-check your calculations. And, once more, there’s another insurance that you can collect from if they screw up.

4. You can still get sued

The worst thing that anyone can tell you is that starting an LLC means that people can’t sue you. That’s no more true than saying that crossing over the zebras will prevent a car from running you over.

Nothing prevents any person from suing your LLC or you personally and, since the legal system works on default, you will have to spend the money to defend that lawsuit, no matter how frivolous.

What the LLC does is to provide you with protection from the results of a legal action. A determined party with deep pockets will still be able to take you to court in an attempt to pierce the corporate veil, make you spend considerable amounts of money and, generally speaking, eating a ridiculous amount of your time for a number of years. Having an LLC in place, provided you’ve behaved properly, will eventually protect you from the consequence of an action, but the process that gets you there will still be long, stressful and extremely expensive. That’s where having a good relationship with your lawyer will come in handy.