By creating a single-member LLC, the member creates a legally-recognized entity that is separate and distinct from the member herself. Any legal issues or liabilities that arise are on the LLC itself and not the liabilities of the individual member.
Or…that’s the idea, at least.
Although the purpose of the LLC is to protect the member from personal liability, it doesn’t always work out that way. There are times a member can be held responsible for the debts and liabilities of the LLC.
Common LLC Mistakes
The single member of the LLC typically has full authority to do whatever she wants with the LLC. Without the checks-and-balances of additional members, the single-member is empowered to make all decisions for the LLC. That freedom means there is a higher risk of LLC mistakes and, therefore, a higher risk of piercing the corporate veil.
It’s important to note that “piercing the corporate veil” is handled differently in different jurisdictions. For example, the law in Colorado focuses primarily on the “alter ego” doctrine. Courts will weigh 8 different factors when determining if the “alter ego” exists:
- Whether the LLC operates as a distinct business entity;
- Whether funds and assets are comingled.
- Whether adequate corporate records are maintained.
- Whether the nature and form of the entity’s ownership and control facilitate misuse by an insider (single-member LLCs — that’s you!!)
- Whether the business is thinly capitalized
- Whether the LLC is used as a ‘mere shell;’
- Whether owners disregard legal formalities; and
- Whether LLC funds or assets are used for non-LLC purposes.
Check out this episode of All Up In Yo’ Business to learn more about the common mistakes that single-member LLCs make and steps to take to protect your personal liability.
Also, contact us today if you’re in Colorado and need help with your LLC. And be sure to subscribe to our YouTube channel for more All Up In Yo’ Business! If you need help with your LLC consent to action form, you can download a sample consent to action here.
Want to learn more about LLCs? Check out: Piercing the Corporate Veil.