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Common LLC Mistakes: Make sure your LLC isn’t sick

By Howard C. Stross
December 01, 2014

Many people want to set up a limited liability company, commonly known as an LLC, in order to protect their assets. However, an LLC is not a foolproof asset protection device. Well-intentioned people, in the attempt to lawfully protect their assets when they purchase investment real estate or own a business, can make LLC mistakes. Read the list of five common LLC mistakes below and become more informed about your LLC.

Mistake #1: Forming a Single-Member LLC in Florida.

A one member LLC formed under Florida law is not an asset protection device. In Florida, only a multi-member LLC may have creditor protection. A two Member Florida LLC may be an asset protection technique in that the only remedy available to a creditor of one of the Members is to wait for a distribution to the debtor-Member and, through a Charging Order, the creditor may receive the distribution to apply to the amount owed to the Member.

Mistake #2: No written Operating Agreement.

The owners of the LLC are called Members. When someone wants to set up an LLC, the Florida Division of Corporations requires Articles of Organization to be filed. However, this only lists who the Manager is and who the Registered Agent is. It does not include the names of the Members or their ownership percentages. The Members and the Manager should sign a written Operating Agreement. If the Operating Agreement is not signed when the LLC is formed, it probably will never be signed. If the Members and the Manager do not sign an Operating Agreement, they still have one. The Florida Revised Limited Liability Act will control the LLC. However, the Members may not agree with the LLC Act. Maybe one Member contributed cash while another Member contributed sweat equity and the first Member wants to be paid back before profits are split. Maybe there are four Members but they don’t own 25% each. Members should contact a business law attorney to draft an Operating Agreement that contains these provisions.

Mistake #3: No accounting records.

Another common LLC mistake is not maintaining good accounting records. The lack of a paper trail will be used against the LLC’s Members if someone sues the Members individually trying to hold the Members responsible for the LLC’s liability or debt. A paper trail is needed to prepare the LLC’s tax return or to prepare the Schedule E for owners who report income and deductions on their IRS Form 1040 income tax return. Get the services of a CPA to set up your chart of accounts and show you how the accounts are used.

Mistake #4: Not insuring real estate.

It is an LLC mistake if the LLC is not a named insured or additional insured. If your LLC owns rental real estate and the building is destroyed in a hurricane or burns down the insurer will deny coverage if the LLC is not a named insured or additional insured. Discuss with your insurance agent to understand what their recommendations are about insurance coverage, the correct face amount of coverage, and other policy issues. Then purchase the policies of hazard, wind and flood insurance.

Mistake #5: Not funding your LLC into your trust.

It is another LLC mistake if a Member has a living trust for estate planning but owns the LLC in the Member’s individual name. Instead their membership interest should be owned in the name of the trustee of the trust. One reason people establish a revocable living trust is to avoid probate. The trustee of the trust must be the owner of the LLC membership to avoid probate on the death of the person who established the trust.

This article is for general information only and is not intended to provide legal advice. The above list is not intended to be an exhaustive list of LLC mistakes. Some of these LLC mistakes can be repaired. LLC Members should consult with a business law attorney.  Call us at 813-852-6500 to schedule a free 30-minute consultation.

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The lawyers at the Stross Law Firm, P.A. invite you to call or e-mail to arrange a free 30-minute consultation regarding your legal and advisory needs concerning business law, real estate, estate planning, probate and trust administration. We serve clients throughout Florida. Find out how we work and how we may be able to help you.