Protecting the Limited Liability Status of Your LLC

Since the introduction of the Limited Liability Company (LLC), many small businesses have chosen this form of business entity because of the advantages it offers. LLCs provide the limited liability protection of corporations with the pass through taxation of partnerships and sole proprietorships. Pass through taxation simply means that any money earned by the LLC is taxed only once, as income for the members or owners of the LLC, rather than twice with income of a corporation (once for the corporation and once for the owner).

Limited Liability

LLCs also allow the owners (members) to limit their liability by designating their business as an LLC. Limited liability means that an owner of a company is generally not personally responsible for any debts or lawsuits won against the company. The advent of limited liability has allowed entrepreneurs to deploy capital in the business world while not jeopardizing their personal financial security.

Protecting Your Limited Liability Status

While limited liability has been a great innovation for the business, it is important for New Jersey small business owner to understand that there are ways that an LLC’s limited liability can be undermined. One of the easiest ways to lose limited liability is to allow materials from the LLC, such as marketing tools, invoices, estimates, and  business cards, to circulate without the LLC designation.

There is a need to provide notice to individuals and other businesses that you are operating with limited liability. The reason is that other businesses might reasonably rely on the fact that you are personally responsible for any debts or injuries caused by your business if it is not clear that your business is an LLC.

Due to this potential reliance, businesses operating as an LLC should take extra care to make it obvious to their customers and other businesses that they are operating with limited liability. For example, it is wise to include a business name with the LLC suffix on all correspondence, including emails. In general, it is usually a good policy to err on the side of caution by making the company designation clear wherever feasible. If a disagreement were ever to arise regarding knowledge about one’s limited liability, it is always helpful in subsequent litigation to have clearly listed the LLC status on all company materials and correspondence.

Help with your LLC

The innovation of the LLC married the two concepts of personal limited liability and pass-through tax treatment for the benefit of the small business owner. It is always important to understand fully your options when deciding which type of business entity to operate under. Each one has its own advantages and disadvantages. It is also important to understand how to operate your business to ensure you take advantage of the full protections of whichever business entity you form.

While the innovation of limited liability for the small business owner has allowed for more efficient deployment of capital, it is important to ensure you preserve the advantage of the limited liability protection of your business. If you’d like more specific guidance on these issues in our area, please contact the Moorestown business lawyer at Dash Farrow LLP to learn more.