Why Forming an LLC May not be Enough to Protect Your Business

Most small business owners and entrepreneurs that we work with know that forming an LLC or other limited liability entity can shield business owners’ personal assets from the business’s debts and liabilities. However, far fewer know that how they operate their business might jeopardize this valuable aspect of the limited liability entity.

Let’s take the case of a cycling enthusiast who opens a bike shop in Portland, Oregon. Wanting to be protected, he goes online and forms an LLC under Oregon law. However, because he is running the business entirely on his own, he doesn’t open a separate bank account for the business, doesn’t adopt an operating agreement, and any records he does maintain are inconsistent.

Unfortunately for our hard-working business owner, one of the parts he uses to fix a customer’s bike is defective, and the customer sues after suffering serious road rash as a result of the malfunction. The LLC itself doesn’t have the money to pay the claim, so the customer is going after the owner’s house, personal savings account, and whatever else he can get.

Operating as an LLC would normally protect against this type of situation. However, LLC owners who fail to observe certain formalities, such as adopting and abiding by an operating agreement, keeping business and personal funds separate, and maintaining adequate capitalization, might find their personal assets exposed to business debts.

At Northwest Business Law Group, we advise all of our emerging business clients on specific steps they must take to maintain the protection of their legal entity, such as adopting an operating agreement and strictly observing that agreement’s provisions. Contact us to find out how we can help you run your business without any fear of personal liability.

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