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Respect the LLC or Get No Protection

Jay Adkisson in Forbes. Iowa bankruptcy court ruled against owner of single member LLC because LLC was not adequately capitalized and owner did not treat it as distinct entity.

First, no business entity provides any more protection than it is treated as a bona fide and independent commercial operation. So, if somebody thinks that they can just spend a few hundred bucks for an LLC and just continue to conduct business as if it doesn’t exist, but then stand behind it when a creditor appears, they are seriously mistaken.

Mixing business and personal operations and obligations is the easiest way to blow this.

Second, a business entity must be capitalized adequately for its purpose — this is a common weakness with single-owner and closely-held entities. Adequately capitalized means that the company has sufficient assets to back up the business that it is conducting, and the debts that it is incurring. So if a business has creditors with claims up to $200,000 but only $100 in capital, there is not a chance that it will be determined to be adequately capitalized.

Indeed, inadequate capitalization is the common Achilles Heel of single-owner and closely-held entities; few are adequately capitalized, or even have owners who have any idea what the level of adequate capital for their entity would be.

But without adequate capital, no business entity is anything more than so much paper at the Secretary of State’s office.


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