Myth Busters about LLCs: Clarifications from LLC Formation to Daily Operations
Updated: May 21
Limited Liability Companies (LLCs) are one of the most popular forms of business organization in many jurisdictions worldwide. Setting up an LLC is accessible to anyone, and its operation entails low costs and relatively straightforward formalities. However, due to the widespread use of LLCs, legal myths about this type of entity have emerged, concerning either the process of LLC formation, the relationships between LLCs and their shareholders, or some routine operations.
These myths can influence the decisions of entrepreneurs and investors who are choosing between forming an LLC and other available forms of business entities. In this article, we analyze some of these myths and provide clarifications to facilitate a correct understanding of LLC establishment and operation.
Myth 1: LLCs Offer Complete Protection Against Personal Liability
One of the most common myths is that forming an LLC provides complete protection against personal liability for founding members. In reality, there are shades of gray.
As a rule, an LLC offers enhanced protection of shareholders’ liability. The obligations assumed by the LLC are the obligations of the company and not of the shareholders. Contracts entered into by the LLC are signed on behalf of the company as a separate legal entity from the members, and generally do not create any obligations for the latter. In other words, the general rule is that shareholders who form an LLC cannot be held liable for the company's obligations, cannot be sued for the company's debts, and do not have contractual obligations to the business partners of the LLC.
However, there are exceptional situations in which members who form an LLC may be personally responsible for the debts or obligations of the company. Some examples include:
Voluntarily assuming obligations by the members of an LLC
This refers to the deliberate undertaking of contractual obligations by LLC shareholders for the benefit of the company. Frequently, individuals who extend loans to the LLC through template loan agreements for companies, service providers who engage in template service contracts, or financial institutions that enter into loan agreements may require personal guarantees or mortgages from the LLC members to extend loans or credit to the LLC.
In such instances, LLC shareholders personally assume obligations by executing suitable contract templates for the legal transactions they intend to facilitate. Legally speaking, this situation doesn’t deviate from the norm, as LLC members are accountable for their own obligations rather than those of the LLC. However, the reasons behind entering into various contract templates lie in the relationship between the members and the LLC, ultimately ensuring the fulfillment of the company's obligations.
Legal liability of shareholders
In some cases, courts may decide that shareholders or directors of an LLC have acted negligently or violated applicable laws in managing the business, which can engage their personal liability. Among the most well-known situations is the theory of lifting the corporate veil, also known as the doctrine of lifting the corporate veil. It is a legal principle referring to the courts’ ability to disregard the legal personality of a company and treat its affairs as those of its shareholders. This concept is often invoked in situations where owners of a limited liability company (LLC) or a stock company (SA) use its legal structure to avoid personal liability for debts, obligations, or illegal actions.
The primary function of the doctrine of lifting the corporate veil is to protect the interests of creditors and third parties affected by the affairs of the LLC. Generally, courts may disregard the legal personality of the company in cases of fraud, abuse, illegal operations, or actions contrary to public interests.
Insolvency proceedings
Individuals within the LLC who have been involved in its management may be personally liable in the insolvency procedure when found guilty of a series of acts such as:
Using the assets or resources of the legal entity for personal benefit or for the benefit of another person.
Directing, for personal interest, the continuation of activities harmful to the LLC.
Maintaining fictitious accounting records, causing the disappearance of accounting documents, or failing to keep proper accounting records in accordance with the law. In case of failure to deliver accounting documents to the judicial administrator or liquidator, both fault and the causal link between the act and the damage are presumed. The presumption is relative.
Diverting or concealing part of the assets of the LLC or contracting fictitious debts.
Using ruinous means to obtain funds for the LLC, with the purpose of delaying the cessation of payments.
In the month preceding the cessation of payments, paying or directing payments to a creditor in preference to others.
Intentionally committing another act contributing to the insolvency of the LLC.
Myth 2: LLCs are Suitable Only for Small Businesses
While LLCs are a popular choice for small and medium-sized enterprises (SMEs), they can be just as suitable for larger businesses, depending on their specific needs and objectives. The law does not limit the establishment of an LLC, its object of activity, daily operations, or the growth potential of an LLC. In fact, LLCs are suitable for businesses of various sizes, from small and medium-sized enterprises (SMEs), startups, family businesses, to future "unicorns". Read about how companies can give sponsorships.
Myth 3: LLCs are Too Complicated Compared to Sole Proprietorships
Although the process of setting up and managing an LLC may seem complicated to individuals with no experience in managing companies, the reality is different. Managing an LLC is a relatively straightforward process if you have the right information.
All you need to do is:
Download suitable legal document templates for LLCs from Docs & Deeds based on the type of LLC you want to establish. We have: articles of association for sole shareholder LLC, articles of association for multiple shareholders and bilingual articles of association, for when one of the shareholder is a foreign national.
Use an electronic signature to open a user account on the www.onrc.ro platform, where you can submit all the necessary documents for establishing an LLC. After approval of the application, you receive the incorporation certificate via e-mail or in other manner chosen by you upon completing the application. Everything can be done and your LLC set up from your computer, with no need to go before public authorities or use firms specialized in trade register.
Download professional contract templates, drafted and verified by lawyers, at the lowest prices on the market. They will make a huge difference in relation to your LLC company contractual partners, by offering the ultimate protection for your rights.
Download template resolutions for the general meeting of shareholders to implement general decisions or particular ones, such as share capital increase, share capital decrease, amending articles of association, transfer of shares toward a third party.
If your company has to dealt with difficult debtors, use professional legal templates for debt recovery or legal notifications for due payments or consult a lawyer in a scheduled online legal consultation.
Myth 4: LLCs Cannot Commit Crimes
If you haven't worked in the legal field, it may seem strange that legal entities can face criminal liability. After all, companies exist only ”on paper” have no material form, no will of their own (basically, the shareholders decide with a majority and through the procedures required by law), and no reason to make decisions.
While it's true that companies don't have reasoning ability, their management bodies are made up of natural persons who possess such attributes. The decisions of the management bodies— which are often collective— equate to the will of the LLC and thus make it a subject of both criminal and civil law. Therefore, LLCs can also commit crimes. Of course, you can't arrest or imprison a company, but you can impose fines or other sanctions that serve the same repressive and preventive purpose.
Conclusion
Limited liability companies (LLCs) provide a flexible business management structure and can be established relatively easily and economically. Additionally, forming an LLC can offer effective protection for its members who, as a rule, are not personally liable. However, it is essential for entrepreneurs and investors to correctly understand the legal and financial aspects involved in establishing and operating an LLC and to seek advice from legal professionals to make informed decisions that align with their specific objectives and needs.
By dispelling myths and misunderstandings about LLCs and promoting a fair and balanced understanding of these legal entities, we can contribute to stimulating entrepreneurial spirit, growing businesses, and fostering sustainable economic development in our communities.
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