Costly Mistakes to Avoid as an Officer of a Corporation or Manager of an LLC!

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Forming a separate legal entity is a huge step in separating your personal and business liability. You obtain liability protection with a separate legal entity the day you file the LLC or Corporation.

What most people do not realize is that after day 1 and beyond you are not protected unless you operate the entity as a separate legal entity.

That involves avoiding commingling of funds, proper capitalization and proper minutes and resolutions as your role as the director, officer, shareholder or manager, member or member of an entity.

Typically as a director of a corporation or a manager of an LLC, your liability is limited personally. As long as you operate within your role as the manager of an LLC or director of a corporation. Nevada will protect you as long as you do not commit fraud. Other states have a minimum fiduciary duty or duty of care.

Let me cover for you the biggest mistakes we have seen over the years that have caused unnecessary liability to directors, officers and managers:

Not using your corporate or LLC title
when signing contracts, checks, documents, licenses…followed by the name of the entity. Signing your name without any title or reference to your company may mean that you are representing yourself personally and that brings personal liability to you. You presented yourself as an individual vs. the manager of an LLC. That is a huge mistake.

Continuing to operate as a sole proprietorship even though you have formed a separate legal entity.
This is a big one. This means you are operating a business in your own name, for a month or several months before you formed the LLC or Corporation. Perhaps you filed a DBA name (doing business as) like Marketing Solutions
and the new LLC is Marketing Solutions, LLC and you are still doing business under Marketing Solutions with the bank account in that name under your SSN. That is a huge mistake! Reconnect that DBA name to the new LLC or Corporation. You do that by dissolving the DBA linked to you as the applicant and re-file that same day a new application with the LLC as the applicant. Now the DBA name is connected to the LLC or Corporation for liability and tax purposes.

Binding the Corporation or LLC with more debt when you did not have the authority or permission.
Make sure you read the operating agreement of the LLC or bylaws of the corporation to know the roles and responsibilities. It may require a majority vote of the owners of the entity to bind the entity with more debt. Don’t assume since you are president of the corporation you can do that any time you want.

Commingling business funds for personal expenses.
If you have an LLC taxed as an S corporation, for example, all profits will flow through to the owners. That doesn’t mean you should take a check from the LLC bank account and write it directly for personal use items like the groceries. You can write a check from the LLC to your personal bank account first (as a distribution) then use your personal account to pay for personal items. That is a two-step process vs. the big mistake of taking one step and writing the check from the LLC account directly for personal items.

Dissolve the company and understand the ramifications of that decision.
Most people want to dissolve a corporation or LLC because it has financial problems and they just want to have the problem go away. Their solution is to dissolve or “shut down” the LLC or Corporation to make the “financial problems” . It is not that easy. In Nevada, after you dissolve a corporation you are personally liable for any suits that arise for up to two years after the corporation is dissolved! Check out the statute at (NRS 78-585) https://www.leg.state.nv.us/NRS/NRS-078.html

The other major area that will help you protect yourself personally is to understand the roles and responsibilities of a corporation or LLC. You may be a one-person corporation or LLC and you may wear many “hats” but you must be consistent with the proper “hat” you are wearing at the time and your authority. Just because you are a one-person corporation does not mean you do not have to have a meeting with “yourself”. Yes, you do. Again, remember, you are not one in the same as the LLC or Corporation. It is a SEPARATE legal entity.

The shareholders of a corporation are the investors who receive ownership in the corporation in return for money or assets they invest. The shareholders elect a Board of Directors, which has overall responsibility for the business. The Board, in turn, elects the officers of the corporation, typically a Chief Operating Officer or President, Vice President, Secretary, and Chief Financial Officer, to handle the day-to-day affairs of the corporation.

The Board of Directors has the overall responsibility for the corporation. The directors must act in accordance with the best interests of the corporation and its shareholders. They have a fiduciary relationship with the corporation, which is founded on trust and confidence. The Board is required to hold annual meetings but usually meets more often than that.

The Board initially:

  • Adopts Bylaws
  • Designates the principal business office
  • Elects officers
  • Selects the fiscal year
  • Designates the corporation’s bank or banks
  • Issues initial stock to shareholders
  • Pays organizational expenses
  • Authorizes initial agreements

On an ongoing basis, the Board will:

  • Issue securities
  • Adopt a Stock Option Plan
  • Amend Articles of Incorporation or bylaws, as necessary
  • Enter into major contracts, leases, or other obligations
  • Declare distributions, dividends, or stock splits
  • Borrow significant sums of money
  • Enter into employment agreements with key employees
  • Elect officers of the company
  • Adopt or amend employee benefit plans
  • Call shareholders’ meetings
  • Buy or sell significant assets
  • Adopt company policies.

The officers, who are elected by the Board of Directors, handle the day-to-day management of the corporation, along with the employees of the corporation.