Creating a Limited Liability Company (LLC) is one of the most popular options for small business owners and real estate investors to shield their personal assets from liabilities. However, many individuals choose to set up their LLCs without professional guidance, leading to risky oversights that can nullify the very protections they sought to establish. 

At Mortellaro Law, we want to highlight three significant risks associated with DIY LLCs, emphasizing why consulting with an asset protection attorney in Tampa is essential to safeguard your assets effectively.

1. Neglecting Corporate Governance Requirements

One of the critical mistakes that DIY LLC owners make is neglecting the corporate governance requirements necessary to maintain the LLC’s protection status. An LLC is recognized as a separate legal entity, which means it can provide liability protection to its owners—also known as members—when operated properly. However, if the necessary formalities are not observed, this protection can be compromised.

What is Corporate Governance?

Corporate governance entails the rules and practices that dictate how a company is directed and controlled. For LLCs, this includes:

  • Board of Directors: The LLC must have a board of directors that officially manages the company’s business and assets. 
  • Yearly Reporting Requirements: Most states require a yearly financial report be filed, at least with the board of directors and stakeholders, if not with the state. 
  • Operating Agreements: While not always mandatory in all states, having a written operating agreement is crucial. This internal document outlines the management structure and operating procedures of the LLC. A well-drafted operating agreement can help clarify ownership stakes and responsibilities, which is vital when misunderstandings or disputes arise.
  • Meeting Minutes: Although LLCs are less formal than corporations, maintaining records of yearly meetings, significant decisions, voting processes, and changes in management is essential.
  • Separation of Personal and Business Finances: Mixing personal and business accounts can blur the lines between your personal assets and those of your LLC. This commingling can give grounds for a court to pierce the corporate veil, exposing your personal assets to creditors.

What’s the Risk? | Asset Protection Attorney in Tampa

When these requirements are overlooked, a court may find that the LLC lacks legitimacy, thereby stripping away its limited liability status. This scenario can result in dire consequences should a lawsuit arise, potentially leaving your personal assets—including your home, savings, and investments—vulnerable.

The Solution:

Elect a board of directors, hold regular LLC governance meetings, and review the business of the LLC. Keep accurate records of yearly corporate governance meetings and all LLC transactions, and maintain separate bank accounts for your private business and the LLC. 

2. Single LLCs Holding Multiple Properties

Another common pitfall for DIY LLC owners occurs when they place multiple properties under a single LLC. While this may seem economical, it can dramatically increase the risk exposure of your assets.

What’s the Risk?

If a lawsuit arises concerning one property—perhaps due to an accident on the premises or a tenant-related legal dispute—the entire LLC can be put at risk. This means that not only could the property at dispute be lost, but any other assets held by that LLC could also be affected.

Consider the following scenario: you own three rental properties within a single LLC. A tenant from Property A suffers an injury and files a lawsuit against your LLC. If the court rules in their favor, damages awarded can be taken from not just Property A, but also Property B and C, even if those properties were entirely unrelated to the incident.

The Solution | Asset Protection Attorney in Tampa

To mitigate this risk, our asset protection attorney in Tampa recommends creating separate LLCs for each property you own. This strategy helps ensure that liabilities associated with one property do not jeopardize your other assets. In doing so, you create a firewall between your investments, ultimately enhancing your overall asset protection strategy.

3. LLCs in Both/All Owners’ Names | Asset Protection Attorney in Tampa

A common misconception among multiple-member LLCs is that including all owners’ names in the LLC will provide optimal protection. However, this approach can set the stage for complications, especially in the event of an accident or death involving one of the members.

Why is This a Risk?

If an incident occurs, and all the LLC’s owners are deceased, the LLC may become subject to probate proceedings. Probate is the legal process through which a deceased person’s estate is administered, which can entail significant costs and delays. The assets within the LLC must go through probate before they can be transferred or distributed to beneficiaries.

This can strain the financial resources of the surviving owners and complicate the management of the LLC. Additionally, assets tied up in probate can hinder the business’s operational capabilities and deter potential investors or lenders due to the uncertainty surrounding ownership.

The Solution | Asset Protection Attorney in Tampa

An asset protection attorney can advise on creating an estate plan that effectively addresses these risks. Options may include designating a succession plan within the operating agreement or considering the use of trusts to circumvent the probate process altogether. By facilitating a smoother transition and ownership transfer, these strategies optimize both asset protection and business continuity.

Frequently Asked Questions About DIY LLCs

What are the risks of starting a DIY LLC?

Starting a DIY LLC can lead to significant risks, including improper formation, compliance issues, and potential challenges in establishing your entity’s legitimacy. Mistakes in the filing process or misunderstanding the legal requirements can expose your personal assets to liability.

Why is professional guidance important in forming an LLC?

Professional guidance ensures that all legal requirements are met accurately and in compliance with relevant laws. An experienced attorney can help navigate complex regulations, state-specific laws, and nuances that you might overlook when attempting to form an LLC on your own.

How does improper formation impact my business?

Improper formation can result in the loss of limited liability protection, exposing personal assets to business liabilities. It can also hinder your ability to raise capital, secure loans, or establish credibility with clients and suppliers.

Can I handle ongoing compliance myself?

Managing ongoing compliance can be complicated. Many DIY LLC owners underestimate the importance of proper record-keeping, annual reports, and tax filings. Failing to meet these requirements can result in penalties or even the dissolution of the LLC.

How can a professional help with asset protection?

A professional can guide you on structuring your LLC to enhance asset protection, ensuring that personal and business assets are adequately separated and safeguarded from potential liabilities. 

Partnering with an Asset Protection Attorney in Tampa

Establishing an LLC is a straightforward process, but doing so without professional guidance may leave you exposed to unnecessary risks. Understanding the importance of corporate governance, the implications of utilizing a single LLC for multiple properties, and the potential pitfalls associated with naming all owners in the LLC are essential.

At Mortellaro Law in Tampa, we help clients navigate these complexities. Our team can provide tailored guidance to ensure your asset protection strategies are solid and effective. Don’t leave your wealth to chance—consult with an asset protection attorney to build a secure future for your assets today. Contact us to learn more!