Arizona law provides the general rule that a member of an Arizona LLC is not liable for the debts and obligations of the LLC solely by virtue of being a member of the LLC. There is an exception to the general rule that arises when a court “pierces the veil” and holds the members of the company liable for the LLC’s debts and obligations. To lessen or eliminate the risk that a court may pierce the veil of your LLC, you and your company should adhere to the following rules:
- Deposit all LLC money into the LLC’s bank account.
- Pay all LLC expenses from the LLC’s bank account.
- Maintain LLC books and records separate from those of the members.
- Maintain LLC accounts separate from the members’ accounts.
- Do not commingle LLC assets with those of the members.
- Conduct all LLC business in the name of the LLC.
- Maintain separate financial statements for the LLC and the members.
- Observe company formalities such as commemorating important decisions in the form of minutes and/or resolutions signed by the members and/or managers.
- Do not allow the LLC to guaranty the obligations or debts of a member unless all signers of the guaranty are willing to accept the personal liability that goes with the guaranty.
- Use stationery, invoices and checks that are different from those of the members.
- Do not pledge LLC assets for the benefit of a member.
- Do not loan money from the LLC to a member unless the terms are commercially reasonable, the loan is evidenced by promissory note, and the members and/or managers sign a resolution approving the loan.
- Always hold the LLC out to the public as a separate entity.
- Maintain adequate capital in the LLC in light of its contemplated business operations.
- Always acquire and maintain the types of insurance that is appropriate for the LLC’s activities. Make sure each policy for a reasonable coverage amount. Purchase umbrella insurance if it can be purchased for a reasonable premium.
The first two rules listed above are probably the most important formalities that your LLC must always follow. It is especially important for single member LLCs to follow the above rules. Many people who own single member LLCs tend to fail to dot the eyes and cross the tees, which greatly increases the risk that a court may pierce the veil and hold the single member liable for the debts of the LLC.