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Your Florida LLC or Corporation [Is It Vulnerable To Lawsuits?]

Florida LLC or Corporation
 As a small business owner, it is very important to make the time to address “housekeeping” issues proactively to protect your business.
Most business owners just press forward without thinking about the ramifications of a lawsuit. Yet every business owner faces liability from any number of sources such as customers, vendors, landlords and employees. Managing this legal risk is one of the primary reasons for creating a business entity such as a Florida LLC or Corporation. The reason, of course, that the business entity helps to manage the risk of litigation is because it basically puts a legal shield between you, personally, as the business owner (and others if partners or shareholders) AND the person or entity suing the business. So, this legal shield can be a great thing. However, there are some common missteps that make this legal shield less effective and can cause it to fail at the worst possible time…during a lawsuit.

 Common Asset Protection Mistakes with a Florida LLC or Corporation

Mistakes During the Process of Forming Florida LLC or Corporation

Asset protection mistakes occur either during the “formation” process, when the LLC or Corporation is created OR during the “administration” (housekeeping) process. So, the key is to make sure your business entity is formed effectively and is being regularly maintained so that all the legal formalities and requirements are up to date.

Although it isn’t necessarily exciting maintaining your Florida LLC or Florida Corporation with attention to detail is a way to make sure that your business entity is not making you unnecessarily vulnerable to lawsuits. Business entities in Florida, and most states, are susceptible to lawsuits that seek to  “pierce the corporate veil”.   If this is allowed for any number of reasons, the attacking party may disregard the entity as a legitimate business entity and gain access to the owner’s personal assets. 

1. Failure to Create Corporate Bylaws or a Shareholders’ Agreements or an LLC Operating Agreement

It is all too common for well meaning non-lawyers to volunteer to help you create an LLC or corporation. I grudgingly admit that these entities can be created on line in Florida and probably all other states by now. However, the critical detail is that if you create an entity with the state government directly, on line, you’re only filing articles or incorporation or organization and they are leaving the rest up to you. If you go with an online forms provider, like LegalZoom, they give you boilerplate documents with very little opportunity for specific input to make the documents relate to your business and circumstances.

This failure to customize or create specific documents is an asset protection problem because it is a weakness that can be exploited by an aggressive plaintiff’s attorney who is seeking to pierce the corporation veil (to get your personal assets).

Additionally, a shareholders agreement or Operating Agreement in Florida is a valuable asset protection tool in itself. These agreements are valuable because they can set the expectations of partners in advance, thereby preventing lawsuit. They also can include damage control provisions that can keep creditors from taking certain disagreeable litigation steps.

2. Failure to Record Minutes for an Organizational Meeting

Another simple but critical oversight is the failure to document meetings. Regular meetings are an important formality that supports the legitimacy of a Florida corporation or LLC. Again, an aggressive plaintiff’s attorney can point to a lack of an organizational meeting as evidence of a sham entity. Similarly if no annual meetings are ever held, this doesn’t appear to support an valid entity for asset protection purposes.

Common Housekeeping Mistakes with a Florida LLC or Corporation

1.  Failure to maintain adequate business records for LLC or Corporation

Do you keep an LLC or Corporate Binder with relevant business records in it?  What are relevant business records you might ask?  Generally, you need to include your annual meeting minutes.  Minutes from your annual meeting should include a summary of business conducted at your annual meeting AND this would reference any changes agreed upon by the board of managers throughout the year, major expenditures for assets or personal having been approved, business strategy analysis or changes, etc.

Other important business records may include resolutions of the managers concerning major decisions or records of the assignment of membership interests to new members.  The list could go on and could involve any significant business decision that occurred during the year.  The key is that there is a paper trail in place to support the legitimacy of the independent business entity (apart from the individual owner/s) because a creditor would seek to discredit the legitimacy of the entity if seeking to pierce the veil.

2.  Commingling personal assets with Florida LLC or Corporation

This issue often is the product of disorganization as much as one of malice…in other words this may not be intentional but owners often times pay personal expenses from the business checkbook or pull out cash for personal reasons.  Other concerns may be using business assets for personal reasons or otherwise treating the business entity as an “alter ego” of  the owner.  In seeking to pierce the veil, a creditor will content that the business entity was not legitimate because it was simply an “alter ego” of the owner/s.  They way to prevent this, in general, is of course to treat business and personal matters separately and document all personal debits from the business as distributions.

3.  Signing business documents in personal name rather than LLC or Corporate Name

How documents are signed, especially contracts, is extremely important and often overlooked.  Generally, business agreements should be signed under the Company Name (LLC name) as Manager.   If a business owner consistently signs personally, a creditor could utilize this fact to again argue that the LLC was simply an “alter ego” for the owner.

So friends, we’ve covered a few of the big pitfalls.  Just know that there are many areas of concern when maintaining your business entity and that competent legal advice is needed to address the specific circumstances of your business and assets.

This is an update to an original article published on August 7, 2014.  

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