Your LLC Isn’t Protecting You if You Do These 5 Things

Your LLC Isn't Protecting You if You Do These 5 Things

Mike Warkentin: (00:01)
What in the hell does this stuff mean? The recommendation of the financial statements to the shareholders of the corporation? I don’t know, but at least my gym corporation is protecting me from any and all liability.

Matthew Becker: (00:12)
Yeah, hold on there, Mike. It might not be.

Mike Warkentin: (00:14)
Wait a second. How do you know? What are your qualifications? 

Matthew Becker: (00:19)
Well, I’m Matthew Becker and I’m an attorney.

Mike Warkentin: (00:22)
So what?

Matthew Becker: (00:24)
And I own Gym Lawyers PLLC.

Mike Warkentin: (00:25)
Ooh, gym lawyers. So you know something about the gym industry. 

Matthew Becker: (00:29)
That’s correct. I also own my own gym called Industrial Athletics here in Pittsburgh, Pennsylvania.

Mike Warkentin: (00:33)

So I guess what you’re saying is that you might be exactly the guy to tell gym owners out there, why their corporation might not be protecting them and what they can do about it. Is that right?

Matthew Becker: (00:40)

That’s correct.

Mike Warkentin: (00:42)

All right. It sounds like we need to dig into this. It is Two-Brain Radio. I’m Mike Warkentin, and I’m asking you to subscribe wherever you are watching or listening, with my thanks. My guest, as you said, Matthew Becker is the owner of GymLawyers.com and Industrial Athletics. He is the perfect union between gym owner and lawyer, and he’s gonna help you figure out why your corporation might not be doing everything you want it to and how you can fix it. So Matthew, let’s get right into it. Tell us what the problems are and let’s roll.

Matthew Becker: (01:07)

Hey, thanks, Mike. Now let’s preface this by saying some of this could get a little bit complicated. In this discussion in the past, we’ve covered some things like corporate leases and other things that, that are a little bit more obvious, but today we’re gonna talk about this interesting concept called piercing the corporate veil, which I always think sounds really cool. But the bottom line is what it means is that that LLC or corporation that you took out when you opened up your gym, may not actually be providing you the protection that you think it is.

Mike Warkentin: (01:42)

That’s not good. ‘Cause I set one up specifically at great expense, specifically to insulate myself risk. So if I’ve got problems, and I know there are a number of gym owners who are gonna be exactly like me, I wanna know what they are and I want to know how I can fix them. So lay them out, let’s roll.

Matthew Becker: (01:57)

Okay. So let’s set up a little bit of a fact pattern here. You wanna start a gym, and so the first thing you need to do is take out an LLC or file an LLC. And that’s short for a limited liability company. Now there’s variations of this, but let’s just keep it simple, a limited liability company. And the role of that is to limit your liability as an individual. So God forbid somebody sues your gym for liability or you know, an injury or breach of contract, or a creditor comes after you or something. You wanna protect your house, right? Or your boat or your bank accounts or whatever it is that you own personally. All right? So you get this LLC. Now let’s advance this to say that you’re operating as your LLC and, like, a year down the road, somebody injures themselves in your gym. Now whether or not it’s your fault, doesn’t prevent somebody from suing you. And they’re gonna come after you. And hopefully you have the LLC. So they’re also gonna have to sue the LLC, but a savvy attorney like myself is gonna come along and they’re gonna try to get after you and your personal assets.

Mike Warkentin: (03:11)

You’re piercing the corporate veil.

Matthew Becker: (03:14)

Piercing the corporate veil. Very good. 

Mike Warkentin: (03:19)

I don’t like it. Tell me how to make it stop.

Matthew Becker: (03:21)

Okay. So there are ways that you have to set up your LLC. And the whole concept is to make sure that you keep your LLC and you as an individual completely separate. Or if there’s more than one of you, you know, you have a multi member LLC, then it’s keeping you and your partners and the LLC completely separate because anytime we commingle those two things together, that is guaranteed an easy way for an attorney to pierce the corporate veil and get at your personal assets. All right. So I wrote down here the five best ways and for simple companies like gyms to help prevent this potential for piercing the corporate veil. All right, number one, you need an operating agreement. Okay. And this is simply a document, multipage document, that lays out the corporate structure of your LLC, right? So sometimes it can be difficult for people to accept the fact that they need an operating agreement because no state that I’m aware of actually requires you to have an operating agreement.

Mike Warkentin: (04:35)

So it’s something you can skip if you’re busy, but you shouldn’t.

Matthew Becker: (04:38)

That’s correct. It’s something that doesn’t necessarily have to be in writing under the law either. States will say that they’ll honor oral operating agreements now.

Mike Warkentin: (04:49)

Oh, then I have one. We did that.

Matthew Becker: (04:51)

Yeah, yeah, yeah, no. if there’s one thing that you take away from this episode, please know that anything oral is not legally binding. All right. It needs to be in writing. All right. So the problem that people run into when they don’t have an operating agreement is that there’s no corporate structure saying that the LLC is going to take over in the event of a lawsuit. It’s called indemnification. There’s another big legal term for you today. Indemnification of you as an individual. So lemme give you a quick example. If you have an operating agreement and somebody tries to sue you, then that operating agreement says that the LLC has to step into the lawsuit on your behalf. Okay. And protect you against the potential liability of that lawsuit. If you don’t have a written operating agreement, then you aren’t provided with that protection from the LLC. So somebody can come in and say, your LLC didn’t agree to provide you any protection. We get to come after you and your individual assets.

Mike Warkentin: (06:01)

Which a clever lawyer might wanna do if your gym assets are 10 grand, but your personal assets are a million. Am I right?

Matthew Becker: (06:07)

Exactly. Yep. Because most of us, and we’ll hit this point down a little bit later. Most don’t leave a lot of money in the LLC.

Mike Warkentin: (06:18)

Specifically for the liability reason.

Matthew Becker: (06:20)

Yeah. Right. Or if you, if you netted, you know, if your net owner benefit was $10,000 last month, most people are gonna take that $10,000 and they’re gonna put it in their own personal bank account. Which really isn’t a problem.

Mike Warkentin: (06:36)

Yep. Chris Cooper would be proud of you. Pay yourself first, get that money out, put it in your bank account where you can do something with it.

Matthew Becker: (06:42)

Unless you’ve now left your LLC insolvent. And that’s a problem. So point number two is improper distributions, the next way that an attorney can go about piercing your corporate veil and getting at you personally.

Mike Warkentin: (06:58)

So first one, to summarize, is make sure you have that operating agreement that says that your corporation will step in, in the event of a lawsuit. That’s the first one. Correct? 

Matthew Becker: (07:07)

Right. And there are other things that,

Matthew Becker: (07:09)

There are other things that we would put in the operating agreement to help protect you. But that’s, you know, you need a written operating agreement. Bottom line.

Mike Warkentin: (07:17)

Okay. So distributions now. Yep. This will be an interesting one for people.

Matthew Becker: (07:22)

Distributions. So technically speaking all of the money that comes into an LLC, and I’m gonna say this, you know, talk to your accountant, but let’s assume that you are set up as a pass through sole proprietorship for tax purposes of your LLC. All of the money that comes into the LLC technically belongs to the member or the owner of the LLC. However, there’s these things called distributions. And the distribution takes place anytime you take LLC money, and you slide it over into your own personal bank account. Right? N-ow there’s the easy way to make a distribution is literally just transfer the money through your online account. But there’s a problem. If you transfer so much money from your LLC, that your LLC can no longer make its debts, then you have rendered the LLC insolvent. And if the LLC is insolvent, then the corporate veil can be pierced in the event of a lawsuit.

Mike Warkentin: (08:25)

So if you gut this thing and pay yourself, you’re just setting yourself up with it. You’ve got this wobbly corporation that is now unstable financially. And in the event of a lawsuit, you are gonna be on the hook. 

Matthew Becker: (08:38)

That’s correct. That’s correct. So let’s look at how this would commonly refer to, or go into a gym, right? So what are your common liabilities that you’re gonna have month to month? Well, you got rent, right? Or mortgage if you own your building, but you’ve got the rent. You have employment. Okay. If you are employing your staff with the W2 here in the States, then you have that liability. You have insurance liability, you gotta pay for your liability insurance, either in a lump sum or each year, something like that. If you’ve taken out a loan, let’s say you took out a $50,000 loan in the name of the business to get the business started and you have to pay on that every month. Right? So all of this stuff could add up to 15 to $20,000 of liability each month, which means that money has to stay in the business bank account. You can’t just take it out as your own and only kind of put it back in whenever you have to pay those liabilities.

Mike Warkentin: (09:42)

I’m guessing, correct me on this, but I’m guessing what happened is that someone probably just, you know, decided, oh, I’m gonna gut my business, pay myself a hundred thousand dollars, leave $2 in the bank account, default on everything. And I’m guessing the legal system probably stepped in and said, we’re gonna prevent that from happening and allow lawyers to go after you personally, if you pull shenanigans like that. Is it something like that?

Matthew Becker: (10:05)

Yeah. That’s basically it. Yeah. You know, when LLC started, people used LLCs, you perhaps have heard of shell companies, right. They’re just gonna use them in order to funnel money through, into their own personal bank accounts without, and then creditors come after the LLCs and there’s no money there in the LLC to get.

Mike Warkentin: (10:25)

Sorry.

Matthew Becker: (10:26)

Yep.

Mike Warkentin: (10:28)

Yeah. So that makes sense. Why that would happen, but it’s something a lot of gym owners don’t know if they make an error.

Matthew Becker: (10:33)

Right. So you’ve gotta leave money in your bank accounts. That’s number two. Don’t take all of the money that you technically have a right to. All right. Number three, pay your taxes. And this is paying the taxes before you take those distributions. So kind of like number two, but every dollar that comes into the LLC is taxable wage. It’s taxable money. So “Profit First” says, you know, you set up your own separate tax account and X percent of every dollar that comes in should be moved over into that tax account. That’s why, okay. You have to take the money out and set it aside for your taxes before you take money for yourself.

Mike Warkentin: (11:21)

And guys, if this goes over your head and the accounting is something you don’t wanna deal with. I’m just gonna plug John Briggs, “Profit First for Microgyms,” check out his book and Incite Tax and Accounting. You can check them out because they are experts in the gym and fitness industry. So if this is starting to sound a little hairy, talk to John.

Matthew Becker: (11:37)

Yeah. Appreciate that. Like Mike, we do actually refer a lot of gym owners over to Incite Tax as well. And again, I know a lot of this stuff can be a little bit complex. I would also encourage anybody to shoot me an email after the show or reach out to us, all our contact information’s on the website. If you add need any additional examples or information about any of this stuff. OK. All right. So we’ve got piercing the corporate veil, or have an operating agreement, leave money in your bank account, pay your taxes.

Mike Warkentin: (12:11)
Pay your taxes.

Matthew Becker: (12:12)
Pay your taxes.

Mike Warkentin: (12:13)
I heard the IRS hired like 90,000 new people to track this stuff down. So you gotta pay your taxes this year.

Matthew Becker: (12:18)

Yep. And finally, well, I’m sorry. Not finally, cause we got two more. Number four is to make sure that you keep all of your money separate from the LLC, as opposed to you as an individual. This is called commingling of funds. Right?

Mike Warkentin: (12:36)

Oh, this happens a lot. Yeah.

Matthew Becker: (12:37)

<laugh>

Mike Warkentin: (12:40)

I know where you’re going with this.

Matthew Becker: (12:43)

I reviewed the bank account of the gym once and I kept seeing liquor store liquor store, liquor store, liquor store, liquor store. And sure enough, the gym owner was not buying liquor for the gym. The gym owner was going out Friday nights and buying liquor for himself. And that’s comingling funds.

Mike Warkentin: (13:05)

Was there a reimbursal or was it just like, I’m just paying for booze with the gym.

Matthew Becker: (13:11)

It was just paying for booze with the gym credit card.

Mike Warkentin: (13:14)

Yeah. So there’s an issue.

Matthew Becker: (13:15)

Because he treated the gym’s bank account as his own bank account.

Mike Warkentin: (13:21)

Okay. So there’s no separation there and that’s gonna be an issue.

Matthew Becker: (13:23)

That’s gonna be an issue. Another way that we’ve come upon this in an effort for people to try to kind of skirt the system is, somebody goes out and, or I’m sorry. No, lemme change that. Somebody needs a new refrigerator at their house, right? So they go out and buy a new refrigerator, but they say it’s for the gym. So that it’s tax deductible. And they put some old refrigerator in the gym, put the brand new refrigerator in their house and then they deduct it on their taxes. That’s not gonna work. If you get audited, the IRS is gonna discover that you used business related money to buy you something personally, you can’t do that.

Mike Warkentin: (14:10)

Now that’s not to say that there are aren’t legitimate business expenses. Like, you know, obviously if you have a staff meeting and you buy some donuts and things like that, like there are processes and IRS calculations for how legitimate business expenses go. But what you’re talking about is when you’re kind of just using the gym bank account as your personal piggy bank, and there’s a blurred line between the two, right?

Matthew Becker: (14:31)

Yes, yes. That’s correct. You can’t do it. Which leads us into our final point. That was number four. And here’s number five, is while all of this formality seems really annoying, you have to be as formal with this stuff as possible. Because lack of formality, and I have some other examples, lack of formality is a primary way to pierce the corporate fail. So let’s look at formality number one, and that is simple accounting. All right. You could say, all right, I brought in, let’s say $20,000 gross revenue this month, I had $10,000 of expenses. I now have $10,000 left over. You kind of do this calculation in your brain. You set aside some taxes and you take the remaining money. You move it over into your own bank account. Sounds like stuff that we’ve talked about thus far, with the exception of your lack of formalized accounting, you need to track this stuff, you know, put it in QuickBooks, put it in Excel spreadsheet, show where every dollar is going, right. Your accountant will be very happy about that. And so will your lawyer.

Mike Warkentin: (15:47)

So it’s really just, it’s just doing business the way it should be done with a paper trail, right? Like not treating it as this whatever, kind of half-assed system that you set up just for the sake of setting it up. And you’re using the personal piggy bank. You’re not documenting payroll. You’re not documenting your legitimate expenses. You’re sliding receipts in the wrong spot, if you even file them at all. You’re just doing all those kind of, we’ll call them just slovenly business practices. They’ll just lead the IRS to look at your stuff and say, this is not a business. This is just like a hodgepodge of, you know, absentminded professor kind of stuff. Right.

Matthew Becker: (16:20)
This is just a guy going in and operating a gym and throwing it under an LLC so it looks like he’s getting protection. That’s basically it.

Mike Warkentin: (16:29)

And so then this isn’t ridiculous amounts of paperwork. It’s just doing the basics and in a gym business, you know, I run one, it’s not like gigantic books full of stuff. It’s basic things that you need to do. And again, a bookkeeper or an accountant can help you do this very, very easily. And once you get in a routine, life is gold and you’re just filing your receipts. You’re doing your stuff. Everything’s good. And that’s gonna provide a layer of insulation for you.

Matthew Becker: (16:53)

That’s correct. And look at your operating agreement and that’ll tell you what formally you need to do. You know, another, if I can throw one final example in here of a common one that we often see is when we have multiple owners for one gym. Partners, multiple member LLCs, however you wanna refer to them, right? A standard operating agreement for a multi-member LLC is gonna require them to have quarterly meetings, monthly meetings, yearly meetings, some kind of shareholder meeting. And during that, they’re gonna discuss what they wanna do with the LLC. And then they’re going to come upon a result and they’re gonna go forth and they’re going to do that, right? And here we see formality of one, you actually have to hold those meetings. They don’t have to be in person, right? They can be over the phone, they can be over Zoom, whatever it is. But you actually have to have the meeting, somebody needs to take minutes for the meeting. And somebody needs to write up those minutes and discuss what was voted on and everything else. And then they just need to go into a file so that it looks like the members of the LLC are getting together, making decisions. And as you said, putting those decisions in writing so that there’s a paper trail as to what’s happening in the LLC.

Mike Warkentin: (18:13)
And on a small scale, this is what Coke and Pepsi and the gigantic corporations are doing. You’re just doing it on a small scale. I’m not a big gym. I don’t have a big situation, but we do have a corporate minute book, it’s held by our accountant. We do have those, like I read in the beginning, we do get financial statements that are accepted upon review by the board of directors, which is me and someone else. But you get what I’m saying? We do follow that. It’s a little bit different in Canada, I think, but not that much. The idea of just documenting everything and following the exact corporate plan as laid out for big and large corporations just leaves that paper trail. And if someone comes and says, did you have that corporate meeting? Yep. Everything was signed. Everything was filed. Everything is in my log book held by my attorney or by my bookkeeper. And you’re golden.

Matthew Becker: (18:53)

Yeah. That’s exactly right.

Mike Warkentin: (18:56)

So list, if you won’t mind, the five things, the brief five things that you just said, and let’s just make sure gym owners know exactly what they can do today to take a look at their stuff and insulate themselves and keep that corporate veil as thick and unpiercable as possible.

Matthew Becker: (19:13)

Yeah. Okay. Number one, have a written operating agreement.

Mike Warkentin: (19:17)
Can you make that for them?

Matthew Becker: (19:19)

Yes, I can. Yep.

Mike Warkentin: (19:21)
Okay. GymLawyers.com. If you guys are screwed on that one, talk to Matt.

Matthew Becker: (19:25)

Thanks Mike. Number one, operating agreement. Number two, leave enough money in the business to cover the liabilities.

Mike Warkentin: (19:35)
So that’s something that you can do. And if you look at your accounting, you’ll know what that number is. Make sure you leave it in there. Don’t be greedy. Pay yourself first, but don’t gut the company.

Matthew Becker: (19:43)
That’s right. Number three, pay your taxes for the business before you pay yourself.

Mike Warkentin: (19:50)
Profit First, the system does lay out an exact system of accounts that can be used for this. If you are not great at this kind of thing, “Profit First for Microgyms” will teach you how to segment your stuff so that you always have this money set aside and paid.

Matthew Becker: (20:04)
Number four. Keep your business money separate from your personal money.

Mike Warkentin: (20:10)
Church and state. Divide that stuff up. Don’t do silly stuff. Okay? Okay. You guys know what I’m talking about? Don’t do it.

Matthew Becker: (20:17)
You can buy something with your business money, but move it over into your personal account first. Right?

Mike Warkentin: (20:23)
Super fair. Yep. Just follow the steps and don’t try and get tricky on things.

Matthew Becker: (20:27)

Number five, stay formal. Don’t just gloss over it thinking, ah, I don’t need all this formality. Nobody will ever figure it out. Okay. Stay formal. Follow the processes, document everything, keep a paper trail. So that if any of this ever come into question, you can prove how it’s happened.

Mike Warkentin: (20:50)

The IRS did not just hire all those people to sit on their hands. They will probably be doing something with their time. That might be looking into you. But if you back your stuff up properly and follow the rules, it’s gonna be A-OK. Anything else listeners need to know Matthew before you close this out?

Matthew Becker: (21:05)

No, I think that’s it. Just wanted to help make sure that even though we’ve gotten an LLC, doesn’t necessarily mean we’re protected. We need to follow some other steps in the process.

Mike Warkentin: (21:16)
If someone wants to talk to you more about this problem and check things out and make sure they’re completely insulated as best they can. They can get ahold of you at GymLawyers.com. And what’s your email address? 

Matthew Becker: (21:27)

Matt@GymLawyers.com.

Mike Warkentin: (21:29)

So guys, if you do not understand all this stuff, or you want an opinion from a guy who understands you, Matthew is that person. That was Matthew Becker the lawyer, on Two-Brain Radio. Thanks for listening guys. Please hit subscribe on the way out, wherever you are watching or listening. Now, here is Chris Cooper with a final message.

Chris Cooper: (21:49)
Hey, it’s Two-Brain founder, Chris Cooper, with a quick note. The Gym Owners United Facebook group has more than 5,600 members and it’s growing daily. If you aren’t benefiting from the free tips and tactics and resources that I post daily in that group, what are you waiting for? Get in there and grow your business. That’s Gym Owners United on Facebook or www.GymOwnersUnited.com. Join today.

Thanks for listening!

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