Most Sacramento small business attorneys are surprised by how infrequently single-person small businesses take advantage of the limited liability company structure for their small business. Some people are shocked to learn that a single person can do business under the protection of a limited liability company. After all, a limited liability company is very “official-sounding” and seems to elicit images of multiple business partners or large corporate status.
The reality is that a sole proprietor – one who operates a business without the actions or investments of others – can very easily enjoy the limited liability protection that an LLC affords, and they don’t need anyone else’s input to do it. The purpose of the limited liability company is to distinguish the individual human business owner from the business itself. This means that a person operating under an LLC cannot be sued personally for any acts or omissions committed by the person as long as he or she was acting within the course of business.
This concept is very important in that it distinguishes which funds would be available to a potential plaintiff in a lawsuit. If the business owner were to breach a business contract or cause a traffic accident while performing business functions, only those funds and assets that are tied to the business could be pursued. The owner’s individual assets would be protected.
In order to maintain this protection, it is important that the LLC owner maintains separate and distinguishable bank accounts. The owner should have a personal bank account in which he or she keeps strictly personal funds, and also a separate business operating account from which the business makes purchases. Profits from the business should first appear in the business operating account. After that, the funds can be dispersed as wages to the owner’s personal accounts.
The extent to which these accounts are kept separate can be a huge factor in determining which of your assets are available to a plaintiff in a lawsuit. If the funds from these separate accounts are frequently commingled, a court may be less likely to protect the individual owner’s personal accounts from attack by a plaintiff. For example, if the business operates as a shoe store, all inventory purchases should be made from the LLC operating account rather than from the store owner’s personal account.
Additionally, it may be in your best interest to separate other aspects of business operation. For example, you may want to purchase insurance policies in your business’s name to protect yourself against events that may occur during the course of business. Similarly, you may want to access loans and lines of credit in the business’s name rather than in your own name. Any behavior that tends to draw a clear and discernible line between your individual capacity and your business capacity is worthwhile.
A Sacramento business lawyer is best equipped to answer more specific questions about managing a single-member limited liability company. Consider speaking with an attorney if you think your sole proprietorship could benefit from the protections of limited liability status.