Hi Reader!
Every year, about tax time, the LLC and s corp questions start rolling in. Things like,
- “Should I become an LLC?”
- “How do I create an s corp?
- “What’s the difference between an LLC and an s corp?”
- “What’s a reasonable salary for an s corp owner?
Most of these answers are pretty straightforward,
- Deciding if an LLC is right is the ultimate Mama bear question: “Are there things you would fight to the death to protect if something went wrong in your business?”
- Deciding if it’s time for your LLC to elect s corp taxation is solely a math question.
- Determining a reasonable salary is a little more complicated, but it is still an equation based on your business revenue, where you live, and what your business does.
But the question rarely gets asked of me, but I wish it would get asked is:
“Is my LLC just an expensive piece of paper? Or will it protect me when I need it to?”
90% of the time when I audit new clients’ LLCs, I discover that if they were to be sued, their LLC might not give them the protection they expect.
Why? Because they aren’t doing the tasks required to keep their LLC strong. Maybe they aren’t:
- Keeping up with their required LLC state tax or renewal filings.
- Documenting the major decisions they make for their LLC.
- Using their LLC name, rather than their personal name, everywhere.
- Keeping the LLC finances separate from their personal finances.
And each time you fail to do one of these things, you start poking holes in your LLC fence.
And then your LLC fence won’t be there when you need it. This might mean that:
- when your LLC tries to take a client to small claims court for non-payment, the court tells you that your LLC doesn’t have the right to collect the payment
- when a client sues you because a project went sideways, they are also able to sue you personally, because you didn’t treat the LLC like its own legal person
When it comes to an LLC, your real-world behavior matters just as much as the paper structure.
And because of that, you need to pay attention to how you treat your LLC, not just if you have the right papers in your files.
👉 Your action item
If someone reviewed my LLC today, would they clearly see:
- a separate business entity
- consistent use of that LLC in contracts/invoices
- consistent separation of LLC and personal finances
- behavior that matches what’s expected of an LLC
Basically, you need to see if you can poke holes in your LLC fence or if the fence holds up under scrutiny. And if they can, then you need to start putting things in place to shore up your fence.
If you only have 20 minutes this week, the task above is the most important thing to do. But if you have a little more time, keep reading.
Chat soon,
P.S. Yesterday marked 12 years of the artist’s J.D. and 10 years of the artist’s Courtyard. A huge thank you, for your support, inspiration, and for joining me on this journey. Here’s to another decade of building and growing together!
The clause to notice
One small section of a contract that can have an outsized impact later.
This week’s clause: Assignment
An assignment clause explains whether either you or your client can transfer your rights or responsibilities under the contract to another person or business.
One thing to look for: If not yet an LLC, then you’ll want to make sure that you allow for assignment of your work under your contract to your LLC if/when you create it. This is commonly worded something like, “Agreement may be assigned as part of a transfer of the assigning party’s entire business.” Including this now means you’ll never have to worry when you make that decision.
If contracts are starting to come up more often in your business, the Contract Decoder is your secret weapon to signing contracts with confidence.
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