Is Your LLC Actually Protecting You?
Forming an LLC can be a smart move for limiting personal liability, but just having an LLC may not be enough. In fact, many business owners assume they’re protected when they’re not. The truth is, an LLC only works if you treat it like a real business and follow the rules that come with it.
Why Most LLCs Fail at Protection
Here are the three most common ways small businesses undermine their own LLC protection:
1. No Operating Agreement
Even if you're the only owner, an operating agreement is essential. Without one, you are subject to state statute default rules, which may produce an outcome you aren’t prepared for. Nevada does not automatically apply fiduciary duties to LLCs. These duties include the duty of loyalty, which means prioritizing the LLC’s interests over personal gains, and the duty of care, which involves making informed and prudent decisions. If you don’t expressly add these in an operating agreement, many foolish acts to the detriment of the LLC will go unpunished as a result. Owners would generally expect that a co-owner would exercise basic, reasonable diligence in fulfilling his or her role, but Nevada statutes permit the opposite. The only way to protect yourself against a business partner turned parasite is by having a well-drafted operating agreement.
2. Missing Annual Filings
If your LLC isn’t in good standing with the state because you missed an annual list or renewal, it may not protect you at all. This is an easy fix, usually by paying a fine, but it’s often overlooked until it’s too late. Don’t get caught in a bad situation with an entity in default.
3. Failure to Document Key Decisions
Keeping good records isn’t just for corporations. LLCs need to show that major business decisions are deliberate and documented. Two of the most common areas where small businesses fall short:
Major Financial Moves:
Taking on debt or making a large purchase (typically $5,000 or more) should be documented. This includes signing a loan agreement, opening a business line of credit, or using a credit card to finance major expense, especially if there's a personal guarantee involved.
Entering Into Major Contracts or Leases:
Any lease or contract lasting 12 months or more, or worth over $10,000, should be reviewed and approved in writing. This includes commercial leases, key vendor agreements, and major service contracts.
Nevada Offers Strong Protection—If You Have an Operating Agreement and Follow the Formalities
Many business owners choose Nevada for its favorable LLC laws. But those protections rely on compliance—especially around operating agreements and formalities. If you’re not willing to follow through, forming your LLC in Nevada won’t do you much good.
Want to make sure your LLC is doing its job?
Find out how Kadian Law can help you put the right legal framework in place to protect you and your business.
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