THE EXCITING NEW BUSINESS
Bill Wiseacre’s first love in business will always be Uh-Oh Enterprises, but like any eager entrepreneur, he kept an eye out for new opportunities. So, when his friend Pete Moonshot approached him with an idea for a new food truck business, Bill signed up. They formed their new company, Meat Expectations, LLC, and Bill bought the new food truck. Pete did most of the day-to-day work, and business was fun, but it wasn’t good (well, the food was good, but the profits… not so good). It wasn’t long before it became clear that Meat Expectations was not long for this world.
Of course, one reason it was not long for this world was because Pete had made a number of very bad business decisions that Bill had not been aware of. They’d signed up for a massive recurring food delivery that they would not need anymore, but the contract was ironclad and kept Meat Expectations on the hook for a full year’s worth of purchases. Nobody would buy the food truck, because all the high-end custom body work and speaker systems Pete had put in the truck were not interesting to any potential buyers, and also weren’t paid off yet — Pete had bought them on monthly financing plans.
EXPECTATIONS VS. REALITY
So, the business failed, but some businesses do, and Bill had had the good sense to form an LLC to shield his assets in case the worst happened. When the food delivery and car parts companies sued Meat Expectations for the remainder of the contracts, Bill wasn’t too worried. Then the discovery requests started coming in, and Bill’s lawyer told him they were in trouble.
Remember I said “Bill” bought the truck? Not “Meat Expectations?” It was Bill’s name on the title, not the LLC’s. Bill and Pete had never bothered to make an operating agreement for their LLC, so there were no corporate records of any kind. When Bill needed to renew the truck’s insurance, he used his personal credit card and never got reimbursed. They had made a separate bank account for Meat Expectations, but Bill and Pete had both accidentally used it to buy personal items and never reconciled their personal and business accounts.
The plaintiffs amended their complaint and asked the court to “pierce the corporate veil,” or, in other words, to make Bill and Pete personally liable for their LLCs debts, despite the “limited liability” the company was supposed to create. Bill was going to have to settle these debts out of his own accounts, and it wasn’t going to be cheap.
THE MOMENTUM LAW PERSPECTIVE: What Bill Should Have Done
- An LLC Is a Shield, But It’s Not a Magic One. Bill should have remembered that forming an entity is the first step in asset protection, not the last. Courts will disregard the entity and expose the owners personally when the owners don’t treat it like a separate entity.
- Keep His Funds Separate or Risk Losing Them. Bill should have kept his personal and business funds separate. Commingling them can cause all kinds of exciting trouble. If Bill did accidentally use the wrong card, it’s not the end of the world, but he needed to fix it and document it.
- Corporate Formalities Aren’t Optional. Bill should have gotten his paperwork in order from the start. Operating agreements and other corporate formalities may feel like busy work, but they’re the evidence that the LLC is a real, independent entity. Nobody likes paperwork, but if nothing else, protracted litigation creates more paperwork than regular record-keeping ever could.
FINAL WORDS
Bill did the “responsible” thing and formed an LLC. But he didn’t do anything to make that a real entity instead of a polite fiction. Forming an LLC or other business entity is only the first step; if you don’t treat your company like a real, separate entity, neither will the courts.
Blog Posts from Uh-Oh Enterprises are cautionary tales from Momentum Law Group. Bill Wiseacre and his family are fictional characters representing real life situations that keep entrepreneurs like Bill from reaching full potential. #donotbelikeBill
