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LLC Structure

by Steve M
(St Louis, MO )

Trying to figure out whats best: DBA or LLC. Basically, I want to protect our home first and foremost. Been married 6 months and the home is in my wifes name only. Im an independent contractor doing delivery and we want to seek our own clients and do our own thing. My wife and I want to form a company. We have the name, etc. and a couple potential clients in waiting.

The dilemma we face is how to form the LLC to alienate ourselves personally and financially from the the LLC and create a veil.

Should we create it in her name only and I sub-contract from her? Do we then open a separate business account at a bank and the company checks go in and she pays me a commission from that?

Would that still provide us any protection in the event of a lawsuit considering we're married and live at the address listed as our business?

Or, should I just call it a day and open the business as a DBA and keep her completely out of matters to protect our home?

Thank you very much!!!

Answer

A DBA gives no liability protection to an individual. If John Smith is Doing Business As "XYZ Contracting", then for the purposes of liability, XYZ and John Smith are the same.

I would suggest creating an LLC in both names. The reason is that separating out the work between the LLC as contractor, and you sub-contracting from the LLC as an individual subjects you to personal liability.

Under your scenario, in the event of a lawsuit against the LLC, the plaintiff would probably name you personally, as the subcontractor who actually did the work, in addition to suing the LLC.

Even worse, if you aren't careful with the paperwork of the subcontracting arrangement, a court could look at the entire enterprise (you, your wife, your LLC), as all being alter-egos of you and your wife. At that point, all jointly held assets are subject to liability.

The best solution to protect your house is to do one of the following:

1. Form an LLC with both you and your wife as members and be careful about keeping your business and personal assets separate.

2. Operate your business as a DBA but ensure that your wife has absolutely NOTHING to do with your business from an operational or managerial standpoint.

The common address between your home and your business does not automatically pierce your veil.

However, if your wife fields calls/writes letters/signs documents with customers/vendors/etc. and lawsuit arises, there could be a claim against her personally for her own acts of negligence.

That's why in scenario 2, where you operate as a DBA, you must ensure your wife has no involvement in the company.

Otherwise, forming a limited liability company with both of you as members will be a better strategy.

Also, as an aside, in Missouri, when a primary residence is purchased by a married couple, the default rule is that the property is owned by the couple as joint tenants in the entirety. What this means is that if a creditor has a judgment against only one spouse, they cannot take the home.

Is there a reason why your house is not owned by both you and your wife as joint tenants in the entirety?

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LLC Structure

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Aug 21, 2008
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starstarstarstarstar 		Separate business and personal assets
by: Simon Maher

As the owner of your limited liability company, obviously your company's profits eventually find their way into your pocket.

It's no different than if you own stock in a corporation and receive a dividend--the money ends up in your pocket, but you are not held liable for corporate debts!

Have your clients make checks payable to your LLC.

Deposit those checks in your business checking account.

Pay your business expenses from your business checking account.

Take your share of the LLC's profits by writing yourself a check (labeled "profit distribution" or something similar) from the LLC's business account.

Where commingling becomes a problem is when the LLC is paying your personal expenses directly--for example, having your LLC send a check to your mortgage holder and you are doing so in order to perpetrate a fraud.

It seems that many people who send me questions are overly worried about veil piercing. Piercing the corporate veil is an extraordinary remedy that judges do not impose lightly.

Let me quote you some language from a 2007 United States Court of Appeals opinion, from the 8th Circuit (which covers, among other states, your state of Missouri--though the standard is similar nationwide):

Disregarding the entity's corporate form under either the alter ego doctrine or the remedy of piercing the corporate veil is an extraordinary measure that should be reserved for exceptional circumstances, and the party seeking to do so bears the burden of proof...

HOK Sport, Inc. v. FC Des Moines, L.C., 495 F.3d 927, 935 (8th Cir. Iowa 2007) (emphasis added).

The Court further explains veil piercing:

Under Iowa law, disregarding an entity's corporate form by piercing the corporate veil is appropriate if "'the corporation is a mere shell, serving no legitimate business purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.'"

Keeping separate books, not engaging in fraud, and observing the minimal formalities required of a limited liability company is going to be sufficient to avoid veil piercing in 99.999% of situations.

If you are concerned about being able to follow LLC formalities, I would suggest using a service like LegalZoom to form your LLC. While it costs more than doing it yourself, their packages include systems to help you keep appropriate records (which aren't nearly as burdensome as a corporation's) and instructions on how to do so.

Good luck with your new business!
Aug 21, 2008
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starstarstarstarstar 		Cont'd
by: Anonymous

The reason our house is in my wifes name only is when we married back in Jan., I was renting and moved in with her. She wanted to add me to the title then, but I wanted to wait until we decided which avenue we were going to take as far as opening a business, etc.. We "oficially" decided to open our own business recently after evaluating and taking all future matters into consideration.

Just for reference: As it stands now my wife would be a part of the business(i.e. answering phones, giving rates, etc., and even driving from time to time). It would obviously be difficult for me to handle all job entailments particularly when I'm on the road and clients want to schedule another run. However, if it meant keeping our home and personal assets shielded from a lawsuit, etc., then I would find a way for sure!

And one issue I guess we're not completely clear on is exactly how do you keep monies paid by our clients via compensation for services seperate from our personal funds? Even if we open a business account we will still be dependent on those funds as soon as they reach the account(particularly in the beginning). And if I choose the DBA and go solo, it would be easy to trace my use of those funds in our personal life as well.

Once again, thanks for taking the time to answer!

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