Tips for Separating Business and Personal Assets in an SMLLC

Learn the basics of separating business and personal finances and maintaining corporate formalities to run a compliant single-member LLC.

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When you start a single-member limited liability company (SMLLC), it’s important to have separate business and personal affairs. That means separating business and personal finances, treating your LLC as a distinct entity, maintaining corporate formalities, and more.

All this might sound complicated, but it’s crucial; it’s how you maintain your LLC’s limited liability protections. Thankfully, with the right approach, you can keep your LLC compliant and in good standing. In this guide, we’ll discuss the essentials of maintaining corporate formalities and separating your personal and business finances.

Maintain formalities for your SMLLC

One reason many entrepreneurs opt for a limited liability company (LLC) over a corporation is the fact that the LLC has fewer corporate formalities. But “fewer” doesn’t mean zero formalities. There are still formalities to maintain, such as adhering to an operating agreement, keeping personal and business finances separate, filing an annual report, and more.

Adhering to these formalities might sound like a hassle, especially if you were previously operating as a sole proprietorship. But from a legal perspective, a single-member LLC (SMLLC) is a separate legal entity from you as a person. And you have to treat it like one. Keeping up the formalities helps you faithfully treat your LLC as a separate business entity.

Why does it matter?

If you’re like a lot of entrepreneurs, personal asset protection influenced your decision to create a single-member limited liability company. Keeping up these formalities helps you maintain that limited liability protection. If you fail to keep these formalities and your LLC encounters a lawsuit, a court might rule to pierce your corporate veil. If that happens, you could be held personally liable for your SMLLC’s debts.

Strategies for Maintaining Formalities

Maintaining formalities is important for the legal protection of an LLC, especially if you’re a single member. Strategies for maintaining corporate formalities as a single-member LLC may include keeping detailed financial records, creating and adhering to an operating agreement, and keeping personal and business finances separate.

While holding annual meetings may not be necessary as a single-member LLC, you should still document any significant business decisions in writing and keep them with your business records. Additionally, it’s important to comply with any state-specific requirements for maintaining LLC formalities, such as filing an annual report or renewing any business licenses and permits.

Keep detailed business financial records

Bookkeeping is a practical way you can protect your LLC. Not only does tracking your income and expenses protect your business’s corporate veil, but it also helps you budget well.

For example, you should keep your bank statements. You’ll also want to record all contributions you make to the LLC along with all profit distributions you make. You should also keep track of business expenses, such as records of salary wages paid, property acquired, business receipts, and much more.

If you don’t feel comfortable doing this all on your own in a vague spreadsheet, our ZenBusiness Money app can simplify this process.

Create and adhere to your SMLLC operating agreement

An operating agreement acts like a charter or handbook for an LLC; it governs exactly how the LLC is run. For multi-member LLCs, this agreement even describes how much each member contributes, how much profit each member receives, and how new members can be brought in.

It’s still highly recommended to create an operating agreement even as a single-member LLC. If you don’t draft your own, you’ll be governed by the state’s default statutes. Drafting your own agreement gives you a little more freedom to maintain procedures that work best for your business. And abiding by that agreement keeps you in the right mindsight to treat your SMLLC as a separate business.

Perhaps most importantly, having an operating agreement as an SMLLC is further evidence that you’re treating your LLC as a separate entity from yourself. If someone takes you to court to try to pierce the corporate veil so they can go after your personal assets, having an operating agreement in place is one more factor demonstrating to the court that you and your LLC really are separate legal entities.

Separate Business and Personal Finances

An LLC is a separate legal entity that can own property, hold assets, and pay its own debts. So, it can have its own business bank account. And it should.

Mingling your personal accounts with your business accounts is a recipe for disaster. But keeping them distinct maintains your corporate veil. That’s just one of several benefits of keeping finances separate. Additionally, having separate accounts saves you time and hassle, especially at tax time.

Strategies for Separating Finances

As long as you have a plan, it’s actually pretty simple to keep your personal finances separate from your business funds. For starters, you’ll want to create a separate business bank account, and to do that you’ll probably need an EIN (Employer Identification Number — think of it as a Social Security number for a business).

You may also want to use accounting software to simplify your bookkeeping. Good software can help you streamline your tax reporting, track monthly expenses, and much more. It’s also a good way to maintain financial records in one place.

Establish your personal salary as the owner

Planning how much you’ll pay yourself from your LLC is a good way to protect the distinction between your finances. Technically, you won’t be paying yourself like an employee (unless you elect S corporation or C corporation status). And even though you’ll get 100% of the profit as the sole owner of the LLC, odds are you won’t want to distribute 100% of the profits to yourself.

Instead, paying yourself “a salary” through your distributions helps you pace yourself and your distributions. With this approach, you’ll be less tempted to withdraw funds haphazardly. Instead, you’ll write yourself a check for a set amount, on a set schedule — similar to the salary you’d receive if you worked for someone else.

Common SMLLC Finance Mistakes to Avoid

Unfortunately, it’s not uncommon for single-member LLC owners to slip up with their business finances. Let’s talk about some pitfalls to avoid.

Undercapitalization

The first common mistake is undercapitalization, when a business entity starts up without enough capital to actually fund its business activities. If this happens and your SMLLC gets into legal trouble, a court could rule to pierce your corporate veil and seize your personal assets.

It’s usually pretty easy to avoid undercapitalization, especially for small businesses. Simply reasonably estimate your business expenses and potential revenue for the first few months of operation. It doesn’t have to be exact; just make an informed projection. Then, when you make your initial contribution, contribute enough money to the LLC to cover all of those expenses. Some SMLLC owners even decide to maintain a minimum balance just to be safe. 

Not Signing or Communicating in the LLC’s Name

When your LLC enters into contracts or pays bills, remember that it’s the LLC itself that’s making those legal agreements. When you’re conducting business activities, be sure to act as an agent of the LLC, not as an individual. And when you write up contracts, ensure that they’re made out between your LLC and the client, not you and the client.

These may seem like minor details, but they’re very important to establish proof that you and your LLC are separate entities.

Limiting Personal Liability

Limited personal liability is a huge advantage of an LLC. But it’s not all-powerful. An LLC’s personal liability only stays in place if the LLC’s corporate veil is maintained.

In a compliant LLC, a court can clearly see that the LLC and its owners are legally distinct entities. As long as the business owners haven’t committed fraud or another offense, the court will usually rule to maintain the LLC’s corporate veil. In the event of a lawsuit, the judge wouldn’t let creditors come after the owner’s personal assets in most cases. Only the business assets would be up for grabs.

Personal Asset Protection from State to State

Every state has slightly different standards for personal asset protections. In general, though, an LLC’s owner has to commit rather egregious errors in compliance for the court to rule to pierce the corporate veil. For example, a one-time mixture of personal finances with business finances probably wouldn’t compromise the corporate veil; repeated offenses or very large sums of money might.

Some states actually treat personal asset protection for SMLLCs less favorably, too. Florida courts, for example, tend to treat SMLLCs more like sole proprietors than LLCs. For more information on personal asset protection standards in your state, we recommend consulting with a local business attorney.

Strategies for Limiting Personal Liability

No one wants to lose personal assets for any reason, especially because of how they run their business. And thankfully, there are ways you can — for the most part — prevent that from happening.

Your corporate veil can only be pierced if a judge rules for that to happen. And creditors will usually only take legal action against you if you default on a loan or commit fraud. With these strategies, you can usually avoid a lawsuit.

Obtain business insurance

It’s very hard to predict what will happen in the long run, even if you’re 100% compliant and responsible with all your business operations. You also can’t predict natural disasters or accidents, all of which impact your cash flow — and your ability to consistently pay your business loans.

A business insurance policy can give you another layer of protection to stay afloat financially if something goes wrong. Even if you’re not involved in a “risky” trade, a small policy can make a big difference in protecting you from unforeseen business expenses.

Follow federal, state, and local laws 

Following legal requirements can feel like a hassle at times, but it’s crucial to maintaining your asset protections. And it’s important to follow laws on federal, state, and local levels. That means that if there are licenses required by the national government, you must maintain them. Likewise, if your state doesn’t honor a professional license you got elsewhere, you’ll have to reobtain it.

Some states also require general business licenses, annual reports, and more to stay compliant. If you’re unsure what requirements are in place in your state, we recommend chatting with a business lawyer.

Use contracts to protect the LLC

Technically, oral agreements are considered legally binding — but they’re pretty flimsy as legal evidence and difficult to enforce. By drawing up a contract with clearly stated terms and conditions, you can protect yourself and your clients. You’ll have a written, provable agreement that both parties agreed to.

Contracts clearly define expectations from the outset. You might find it helpful to have an attorney help you create a basic contract for your most common services that you can use over and over with clients. But for more complicated agreements, a unique contract may be a better fit.

We can help!

Keeping your business compliant and protected all by yourself doesn’t have to feel overwhelming. ZenBusiness can help you navigate the tedious red tape. Whether you need help creating an operating agreement, managing your business money, or staying compliant every year, we have your back.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

Separating Personal and Business FAQs

  • An SMLLC is a disregarded entity for federal income tax purposes, meaning that the IRS doesn’t even recognize the LLC as a taxable entity. Instead, the LLC’s tax burden passes through to its owner. The sole member reports the business income on Schedule C of their personal return and pays personal income taxes. This process often repeats at the state level.

    This taxation structure can change if you elect to be taxed as a C corporation. Then you would file a separate tax return for the LLC. Additionally, if you added other members later on to become a multi-member LLC, then you would file an informational return for the LLC. You might also have to file a state franchise tax for your LLC, but this varies from state to state. There’s also a separate return to file if your LLC owes employment taxes. 

    Business taxes can be quite tricky, so we highly recommend consulting with a licensed tax professional for assistance. That way you’ll be fully prepared when tax season rolls around.

  • It’s best practice to obtain a separate bank account for your single-member LLC. It’s one of the easiest ways to make sure you keep your business finances separate from your personal funds. At a minimum, it’s recommended to keep a separate business checking account, but you might also consider a business savings account. 

    For example, you’ll want to have a dedicated business credit card to pay business expenses. Ideally, it should look different enough from your personal bank account card so you don’t accidentally use it to pay for personal expenses.