Distinguishing Yourself from Your Single-Member LLC

To help ensure you have limited liability, make sure you follow best practices in separating yourself personally from your SMLLC business.



he owner of a single-member limited liability company (SMLLC) may lose limited liability protection if a court decides that there is a so-called unity of interest between the owner and the SMLLC; and the owner, in using the SMLLC form, has perpetrated a fraud or created an injustice.

Unity of interest means a lack of separation or distinction between your SMLLC and you personally. Courts generally look at multiple factors when trying to determine unity of interest and the issues are basically the same for SMLLCs and multi-member LLCs. In general, no single factor is decisive, and how a court weighs each factor will vary from one case to the next.

The most common relevant factors are:

  • undercapitalization of the business
  • commingling of business and personal funds
  • failure to clearly assume obligations in the name of the LLC
  • failure to communicate with others in the name of the LLC
  • failure to follow LLC formalities; and
  • small size of the LLC.

Here's a brief look at the first four of these factors, which are often the most important. The other two, SMLLC corporate formalities and size, are covered in another article in the SMLLC section of the Nolo website.

Undercapitalization

When you first form your SMLLC you should make an adequate initial investment in the new business. This initial capitalization may not need to be very large—what is an appropriate amount will depend on your specific business. A manufacturing business with a lot of machinery, inventory, factory space, and employees likely would have larger initial expenses, and therefore need a larger initial investment, than a one-person bookkeeping service. You should also make sure that, on an ongoing basis, you keep enough money in your SMLLC’s bank account to cover reasonable upcoming expenses. Adequate ongoing capitalization usually is a legal requirement. If you do not form your SMLLC with an adequate (or any) initial investment, or do not maintain adequate (or any) assets on a continuing basis, your business will run a serious risk of appearing to be a mere empty form without any financial substance, and a court therefore may find you aren’t entitled to limited liability protection.

You aren’t required to keep enough money in your business to cover very unusual or unexpected expenses. For example, you aren’t required to keep an extra million dollars in your business account just in case the business gets hit with a huge personal injury lawsuit. However, for many businesses, it’s a very good idea to have liability insurance.

Commingling of Funds

Your SMLLC should have its own bank account. Payments your business receives for its goods and services should be deposited in that account, and money in the account should be used only for business purposes. (Paying yourself a salary is a legitimate business purpose and does not constitute commingling of funds.) Money in your business account should not be used to pay for any personal expenses. Similarly, you should avoid using your personal bank account to pay for any business expenses. If you routinely use your SMLLC account to pay personal expenses, routinely deposit business payments in your personal account, or routinely use personal funds to pay for business expenses, you will blur the distinction between your SMLLC and yourself. In the event of a lawsuit against your SMLLC, this blurring could make it more likely that a court would find that your SMLLC was not a separate entity from you.

Failure to Clearly Assume Obligations in the Name of the SMLLC

Whenever you enter into contracts for your SMLLC, you should make clear that you are acting as a representative of the business. In practical terms, this means that when you sign a contract for your SMLLC, for example in relation to getting a loan, you should make sure that not only is your own name printed below any signature, but also a comma and a phrase like “Member” or “President.” Equally important, you should make sure you’ve printed the name of your SMLLC (e.g., “Apogee Services, LLC”) above your signature or after your name and title. If, for example, you sign a promissory note for a loan to your SMLLC but do not include any mention of the LLC with your signature, you might leave yourself open to personal liability if your business is unable to repay the loan.

Failure to Communicate in the Name of the SMLLC

Similar to the previous item, all communications for your business should state its name. For your emails, use the name of your SMLLC in your signature block. For voicemail greetings, it is a good idea to mention “LLC.” For bills and letters you send out, use the name of your SMLLC in your letterhead. For directory listings and advertising, show the name of your business including “LLC.”

Additional Information

For more information on keeping your SMLLC separate from yourself, including a practical example, check out the article on SMLLCs and Corporate Formalities in the SMLLC section of the Nolo website. For more general information on creating and operating an SMLLC, pick up a copy of Nolo's Guide to Single-Member LLCs: How to Form and Run Your Single-Member Limited Liability Company by David M. Steingold (Nolo).

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