Maximizing Limited Liability Protection: Tips for Running an LLC as an Online Entrepreneur

Have you formed an LLC to operate your online course business, online coaching business, membership site or service business?  Or maybe you are thinking about moving your online business from a sole proprietorship to an LLC. Either way, operating your online business as an LLC can provide many benefits and advantages to you as a business owner. Operating as a separate legal entity, such as an LLC, can provide you, as the business owner, with limited liability protection, opportunities for tax savings and other advantages. For more about choosing a legal entity and the advantages of operating your online business through a legal entity, you can read [NAME OF BLOG AND LINK]. Once you set up your LLC there are a few important things to remember in operating your LLC to maintain the benefits of doing business as an LLC.

Separate Your Personal and Business Finances

Your LLC is a separate legal entity. To demonstrate that your business is separate from you, as the owner of the business, you’ll want to be sure that you’ve separated your assets from the assets of the business. Your LLC will need its own bank account. All of the income earned by the LLC should be deposited into this account, and all of the expenses of the business should be paid from this account. Your LLC should purchase equipment, supplies and materials used by the business and assets owned by the business, such as software licenses, should be held in the name of the LLC. 

Pay Yourself from the LLC

As the business owner, you’ll want to get paid when your business earns income. If your LLC is a disregarded entity, meaning that you are paid directly as the owner of the business, you’ll want to establish a regular draw schedule if you are able to based on your business income. A draw is a term that refers to an advance against the profit of the business.  Rather than waiting until the end of the year after all the expenses and taxes are settled and taking the profit, the owner takes a draw during the year to provide a more reliable stream of income. It may be hard to take the same draw every week or month, especially if the income in the business fluctuates with launches or promotions. In this case, establish a certain percentage of your monthly income that will be your draw. By structuring your finances this way, you help to demonstrate separation from you and your LLC.

Operate the LLC as a Separate Entity 

When you are running your business as an LLC, remember that it is the LLC that is the business. Even though you, as the owner, make decisions as to what the business is going to do and transactions that it will enter into, it is the LLC that enters into them.  Always use the legal name of the LLC, including the “LLC” abbreviation or other indicator that is part of the name - different states have different requirements about what must be included in the name to designate the entity as an LLC. One exception to this rule is if you have registered a dba (doing business as), which is sometimes called a fictitious name or trade name, for the LLC.  In this case, you’ve put the public on notice that your LLC is using a different name and you only need to use the trade name that you’ve registered. 

When your LLC is entering into contracts, it is the LLC that is the party to the contract. As the owner of the LLC, you’ll sign those contracts on behalf of the LLC.  You might be the member of the LLC if the LLC is member-managed, or you might be the manager of the LLC if the LLC is manager-managed. When signing a contract, after the legal name of the LLC, you add your name and put your title, such as Manager or Member. This makes it clear that the LLC is the party to the contract, and you are signing in a representative capacity on behalf of the LLC. 

Learn Your State’s LLC Filing Requirements and Follow Them

After you form your LLC, most states will require that the LLC file periodic reports with the Secretary of State and pay the required filing fee. Some states require annual reports while others require reports biannually. Filing these reports is one of the requirements for the privilege of doing business as an LLC. If you don’t file these reports you risk the state revoking the charter for the LLC. If the LLC loses its legal existence because the state revokes the charter, this can open you, as the business owner, up to personal liability. If you forget to file, usually you can file late, sometimes with an extra fee.  If you’ve failed to file your report for a period of time and the state revokes your charter, it’s also usually fairly easy to revive the LLC by filing additional paperwork to request reinstatement as well as all of the missing paperwork and back filing fees.  This can be expensive to catch up all at once to bring your entity back into good standing and legal existence, so it’s best to keep current with your state’s filing requirements. 

Create an LLC Operating Agreement and Follow It

Even single-member LLCs need an operating agreement. An operating agreement is the foundational document that governs the structure of the LLC, member rights and responsibilities, how decisions are made and how profits are distributed. By following these guidelines you further demonstrate your LLC is a separate legal entity and is operating in compliance with its intended structure. In addition to the operating agreement, establish processes and keep detailed and accurate business records. By keeping track of and staying organized with your contracts, financial transactions, tax obligations, licensing requirements and your overall operations, you strengthen the separation between you and your LLC. Keeping your LLC separate from you is important to maintain limited liability protection. 

Operate with Integrity and Ensure the LLC Can Pay its Debts

This probably goes without saying, but maintaining high ethical standards in the operation of your LLC not only improves the trust with your customers it is also an important step to maintain the limited liability protection afforded by the LLC. Unethical conduct can blur the line between you and your LLC and may give litigants fuel for claims brought against your business to expand those claims to you personally. Adequate capitalization, or ensuring that your LLC can pay its bills, is another crucial element for both operational stability and maintaining limited liability protection. Ensure that your LLC has enough financial resources to support its activities and obligations. If your LLC can’t pay its debts, this is considered Insufficient capitalization, and may be viewed as an attempt to misuse the LLC structure, potentially bringing down the wall between you and your LLC and exposing your personal assets to claims of creditors and litigants.

Obtain Business Insurance

Purchasing business insurance is an important step in properly maintaining your LLC.  Insurance doesn’t impact the legal structure of your LLC, but it does provide the LLC with important financial protection against many different types of claims that may be brought against it. By having insurance coverage in place, the LLC will have the resources to defend against these lawsuits and this helps ensure its financial stability. The types of business insurance your LLC needs will depend on the type of business it operates.  I’ll cover business insurance in a future blog post.

Run Your LLC Properly to Maximize Legal Protection 

Your LLC can only provide you with limited liability protection if you are thoughtful about how you operate it. Be mindful of how your LLC is involved in each transaction, and take steps to keep it separate from you personally. By properly separating your finances, using the full name of your LLC, signing contracts on behalf of your LLC, maintaining accurate records, adhering to filing and other legal requirements, engaging in ethical business practices, making sure your LLC has adequate resources to pay its debts,  and obtaining insurance coverage, you can help ensure the viability of your LLC and the protection of your personal assets. Your LLC is one of the foundational bricks on which you build your business. By safeguarding your limited liability protection through proper operation of your LLC, you are building a strong business that can grow and prosper for many years to come.

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