Some figure it’s all in a name. After all, aren’t limited liability companies formed to save business owners from personal exposure? While establishing an LLC might seem like a great idea in some situations, you should know there are limitations (pun intended) on the protection they afford.
The State of Pennsylvania describes a limited liability company as a “hybrid between a partnership and a corporation.” In many cases, business owners are most concerned about protecting their assets and may, therefore, form a business as a corporation. However, tax consequences are more severe in that business model. Meanwhile, partnerships offer better tax advantages.
New business owners should resist the temptation to search out internet forms to set up their own LLCs. There is no one size fits all solution – and different types of professional businesses have separate filing requirements. For example, “restricted professional services are defined as the following professional services: chiropractic, dentistry, law, medicine and surgery, optometry, osteopathic medicine and surgery, podiatric medicine, public accounting, psychology or veterinary medicine.”
An operating agreement must be completed when setting up a limited liability company. This means determining how the business owners will respond in different situations. For example, assuming there are multiple members to the organization, defining what happens if one becomes incapacitated or dies is critical. What will be the process for dispute resolution?
Limitations on LLCs
Once again, a limited liability company is not an absolute to business owners. If allegations are made that one of the members operated the business as though the LLC was non-existent, personal assets may be at risk.
Take for example the formation of a single member LLC. Somewhere along the way, the company owner was convinced that forming an LLC would act as a superior asset protection. However, there have been cases where just the opposite has occurred. Prospective litigants and creditors could argue that the company operates as the sole member’s alter ego.
You may have heard the term “piercing the corporate veil.” Here in Pennsylvania, the courts have been reluctant to venture past LLCs in assigning personal liability. However, that’s not to say that owners of non-corporate entities should not evaluate their risks.
Choosing the right business entity for your company is critical. Contact Fellerman & Ciarimboli to set up an appointment. We will assist you in determining what will work best for your type of operation.
With more than 40 years of combined experience, the personal injury attorneys at Fellerman & Ciarimboli strive to provide the best service to clients in Philadelphia, Northeast Pennsylvania, and throughout the Keystone State.