Click Here to Get All Podcast Show Notes!
If you think an LLC automatically protects your personal assets, think again. In this episode, Sharran breaks down this common misconception among business owners. He shares the real story of a friend who lost his house despite setting up an LLC, showing how improper implementation can leave you vulnerable.
Sharran talks about the importance of maintaining a proper legal separation between business and personal assets, outlining the crucial steps you need to take to avoid costly mistakes.
If you’re a business owner, this episode is a must-listen. Tune in to learn how to protect what you’ve worked so hard for.
“In court or in process or in procedure, documentation will beat memory every single time.”
– Sharran Srivatsaa
Timestamps:
01:43 – The myth of LLC protection and real-life story
04:40 – Piercing the corporate veil: what it means and why it matters
05:21 – The importance of separating business and personal finances
09:30 – The role of proper documentation in safeguarding your assets
15:27 – How small mistakes can put your LLC protection at risk
19:20 – Recap: Your LLC won’t protect you
Resources:
– The Next Billion by Sharran Srivatsaa
– Board Member: ARC Multifamily Real Estate Investing
– Board Member: The Real Brokerage
Connect with Sharran:
– X
– YouTube
– Threads
Transcript:
[00:00:00] Hey, this is Sharran Srivatsaa. Welcome back to the Business School Podcast. And this is gonna be a crazy episode because my friend just lost his house in a lawsuit, his personal residence, and he actually thought that his LLC for his business protected him. He did everything that you’re told to do. He. File the right paperwork.
[00:00:17] He even got like this fancy corporate seal. But when one of his customers slipped and fell and sued him, the judge went after his house mainly because of how all this was implemented in his life. So if you operate a business or if you are connected to a business, if you have friends that run a business and you have an LLC or a corporate structure associated with it, you want to do things right.
[00:00:35] And that’s what I’m gonna break down for you in this episode’s step by step, starting right now.
[00:00:45] One thing is for certain, just because it’s tried and true doesn’t mean it’s working right now. So the big question is this. Where can you learn what is working right now? The strategies, the tactics, the psychology, and the exact [00:01:00] how to, how to grow your business, how to blow up your personal brand and supercharge your personal growth.
[00:01:07] That is the question. This podcast will give you the answer. My name is Sharran Srivatsaa, and Welcome to Business School.
[00:01:20] So I really didn’t think that this topic would be interesting at all until I made this post on Twitter, which went viral. Then I made a similar post breaking down the entire story on Instagram, which I think has over a million views right now in just a few days. And the reason I wanted to record this was to break down the context around this topic, which is why an LLC won’t protect you if you don’t implement it correctly.
[00:01:42] So. My friend just lost his house. The, the judge didn’t care that he had an LLC and. In fact, that was the opening line of a threat. I post on Twitter and it went viral, and the main reason is why? Because it shattered this myth that way too many PE business owners, maybe like you and me, believe that, hey, you just need to file an LLC and you will be protected.
[00:02:05] Well, that doesn’t work like that. Before I continue, I want to tell you this, this, this episode, may I apply directly to you as a business owner or it might apply to someone on your team. Maybe someone else manages this stuff, or maybe a friend. If you are not the person handling the legal or operational side of your business, you still need to understand this because your house, your savings, your personal assets, everything that you’ve worked your entire life for could be on the line.
[00:02:28] If you don’t do a couple of things well. By the way, if you do have someone else who handles all of this, like a COO or a business partner or in-house console or, or friends or a mastermind group, you should probably send them this so that they can at least protect themselves. Uh, because not knowing something like this could happen, I is just unfair to all the hard work that you’ve done over the years.
[00:02:46] Right. So let me kind of like break this down. This, what a lot of people think is like this myth of just this instant LLC protection. Just because you got an LLC and you filed it with the state and you paid you $155, does it just mean it works? Like no, it doesn’t work like that. So, so here’s the background.
[00:03:01] My friend ran a pool cleaning business. He, I will tell you, he worked super hard. He, and he followed all the guru advice that’s out there. And by the way, most gurus that are online that are spewing this stuff have never opened an lc in their lives. Right. I know. I, I, I know right now I’ve seen gurus talk about LLCs and I’m like, Hey, bro, have you ever opened one?
[00:03:21] He’s like, no, but I know this gets views. I actually have had gurus tell me that they know people because they read from chat GPT that an lc does X, y, Z, and they make content about it. And because they, their team creates the right packaging for that content and the right hook, that video goes a viral, but they have never even opened an LLC in their lives.
[00:03:39] We are, we get way too much information from online gurus who don’t know Jack squat about anything. And I really want you to think about this because we listen to people who just because it on the surface, they look successful, they have not really done anything. And I really want you to think about that because just starting an LLC and thinking you’re safe is not the answer.
[00:03:56] I say this with so much passion and so much, you know, frustration because now my, my friend has to move out of his house. Like, that’s crazy. He, he did all the things right? He filed all the paperwork. He got like this state binder that you don’t even have to get. He ordered a corporate seal that you never actually use and then.
[00:04:14] One of his customers slipped and fell and sued him, and the court went after his house and his personal assets and his personal savings. It was a $155 piece of paper. It was worthless when it mattered most, but it could be, it could really help you. So. There are a couple of terms that you should understand in all of this, and you don’t need to know what they mean, but you need to know when they’re said what it actually refers to.
[00:04:39] So the, the first thing is you will hear this phrasing called piercing the corporate bail. When you set up a corporation like an LLC or a, or some kind of corporate structure, there’s a veil around it. And that veil protects you, uh, and separates you from you, the person versus the business. And that veil is important for all legal purposes.
[00:05:01] Courts will quote pierce this veil and say, the veil doesn’t exist when they see there’s no real separation between you and your business. And this phrase is called unity of interest. Unity of interest essentially says that. If you act like the business, you are the same person. The LLC doesn’t really matter.
[00:05:18] That’s what it really says. And the crazy part is there’s over 75 to 80% of small business owners like Mix personal and business finances. They call that co-mingling. If you co-mingle your personal and business account, if you wire money to your personal account and share it with your business account, if you don’t run it as a separate business, then you don’t have the rights of the corporate veil.
[00:05:39] You don’t have the, it’s not. Seen as two separate things, then they see you are the same as the business, therefore they’re going to hold you accountable to it. So understanding the, you know, the whole idea of the corporate veil is, and piercing the corporate veil is important because you’re gonna hear that phrasing a lot.
[00:05:55] So once you have this business, what, what should you actually do? By the way, please, if you’re not paying attention at all, this is where you actually, these next 12 seconds are probably most important, which is this behavior creates protection, not. Your paperwork that you got, filing an EN file. If you file an entity with your state, you get an LLC, whatever.
[00:06:17] That’s great. That just creates an entity. It means nothing. The behavior around it is what creates the protection. You’ve gotta show the day-to-day operations that prove the separation. You need separate bank accounts. You need separate credit cards. You can never co-mingle expenses. You have to keep records, especially on both sides, like for example.
[00:06:35] You have a, if you have a personal business credit card and you have a business credit card, well, you should use your business credit card for business use and you should use your personal credit card for personal use. Your business credit card needs to be paid from your business account, or your personal credit card needs to be paid from your personal account.
[00:06:47] If at some point someone says, Hey, Sharon, you bought milk for your house using your business credit card, and you could say, that’s not true. Here’s how I use my personal credit card at Safeway that day. That is the documentation that’s necessary. That is what you, that’s how you show separation. And by the way, the best part about this is you gotta do this even if you’re just one person.
[00:07:05] That’s what the entire part of it is. You’re showing that your business is separate from you, and that’s why you will fee. You’ll see a lot of entrepreneurs have 2, 3, 4 business cards because they want to keep everything separate in their lives because there’s no other way to show that you’re running the businesses and the expenses and the operations separately.
[00:07:24] Every transaction, I will tell you either proves or. Destroys the separation. And the crazy part is they don’t need more than a few incidents to actually show that the separation is invalid. Uh, that the is. Because think about it this way. Let’s say you’ve been really good for 80% of the time, but there’s 20% of expenses and 20% of things that you’re sloppy on.
[00:07:47] Well, that 20% is what people are gonna go after and show that. You’re essentially the same thing and you’re sloppy, and it’s not the case, and they will break and pierce a corporate veil. So I, I don’t know how to tell you this. You have to be perfect. Like you have to be perfect, otherwise you lose the entire protection of having it in the first place.
[00:08:05] Everything is to be separate. Everything, and that’s how this works. And so when you have that as a standard, that everything needs to be perfect, you have to be that. You have to be that particular. And only then maybe a couple of things slip and it’s okay, but you have to be perfect. If you’re not perfect, it will pierce a corporate veil and when, and it will not work for you in the time that you need it most.
[00:08:24] And the way to do it is to start right now. Because at the end of the day, if you think about it, if you’ve never done this before in a court of law or with the IRS, whatever it takes, this is the most important thing. It’s proof of documentation. That’s it. If you document everything, if there’s a paper memo for everything, if there’s a right email to support it, if the right cards show the right transaction, if the money trail shows what it is, it’s no one’s gonna put you on a stand and ask you to explain yourself.
[00:08:48] Before you get to that point. You’re going to have to submit your you, your attorney, your CPA are gonna have to submit all the paperwork. And if all the paperwork tells a story, then no one’s gonna go after you. No one’s gonna listen to a pity party, a pity story, nothing, nobody. Because all of these are just documentation based, procedure based verdicts, and most of the time it doesn’t even get to a verdict because two attorneys or two subpoenas will argue and then they’ll say, do you really wanna go to court?
[00:09:14] I’m gonna screw you anyway. And you’re gonna lose both. You’re gonna both lose, and you’re gonna pay all the all the legal fees and you’ll settle. But if you just do the work upfront to be perfect, you will not need to manage anything else. I dunno how else to tell you this. This is the documentation advantage.
[00:09:31] Businesses lost law. Like, let me tell you a crazy story and you will think this is crazy and I promise you this is 100% true. Alright. I bought, I, I. Invested in a company and I wrote a check and I bought 33% of this business. Right when I invested 33, when I bought a check, when I wrote a check and bought 33% of this business, I paper the entire transaction.
[00:09:53] There was a purchase transaction where I paper the transaction and then I, we updated the operating agreement that I did this. Now, by the way, this was a small business, so this was not like a attorney led thing. I wrote a one page memo. I wrote a memo saying, Hey, you have this business. I reviewed the documents.
[00:10:13] This is what I find. This is what it seems to be true. Based on all of this. I’m gonna invest X to buy Y percent of the business as of this date. This is all true. I’m gonna wire you this money. I wrote, I wrote this thing. He, both of us signed this agreement. That’s all it was. It was just an intention because it was not a large company at that time.
[00:10:31] Now the company has grown, and then we updated the operating agreement to have me as the one third owner in this business. And the crazy part is some random person shows up and files a lawsuit, frivolous lawsuit, that says that they own 50% of the company. By the way, just to explain this to you, this happens all the time.
[00:10:49] I’m suggesting to you that this is crazy because I have, I had never even met this person. I had no idea who this person was. I like, I never met this person and this person said that they own 50% of the business. So we, of course. Or went to trial about it, the I sat in front of the judge and a jury explaining my position.
[00:11:09] They brought up all my agreements on the screen, on what I had done and what I had signed showed all the proof, and the jury was still suspected that this other person owned 50% of the company that no one had ever met. Some random person said that they own 50. Like imagine you just filing a lawsuit saying you own 50% of the company and you have no proof.
[00:11:30] And here’s the crazy part, the person, the dude that actually said that he owned 50% of the company. Do you know who his number one witness was? His father. His father was his number one witness that he owned 50% of the business. And it actually went to trial. And there was actually a legitimate chance that he was gonna win, and we had to give up 50% of the company to this dude.
[00:11:52] That’s how crazy this is. Even though we had paperwork, even though we had everything documented in this process, the crazy part is this in court or in process or in procedure, documentation will beat memory every single time. Documentation is everything. And I will tell you, there is no way we would’ve won without this documentation.
[00:12:09] I bought into another company recently and in that company we, it there, there was, it was two partners and I bought in the company recently and they were. I wrote a, a fairly large check to buy to the business, but it was a private party transaction. We agreed upon a deal, et cetera. I didn’t need attorneys, et cetera.
[00:12:25] I could have just wired them the money, but I didn’t do that. I wrote an agreement. I put that agreement to chat GBT into ai. I had it create me an agreement, and the agreement essentially said, Hey, this is all the things that we have talked about. This is everything we’ve talked about and based on all the things that were talked about, I’m gonna write you this check, and based on me writing you this check, you owe me this.
[00:12:46] And based on all of this, it starts on this date and I have all these privileges, and you’re gonna gimme this if you don’t like any of this in the next 30 days. You can wire me my money back and you can void this transaction. And I got them to all, all of us signed it. Now, if anyone questions anything, I have that piece of paper because I documented the whole thing.
[00:13:05] Most people are like, I’m just gonna invest in your company. Don’t invest in anything unless you write it up. Don’t loan, like, by the way, don’t loan anybody any money unless you write it up. Anybody like I’m, I’m sorry. If my son asks me for a loan, he’s gonna sign a promissory note because I need to show in my statements that like, this happened.
[00:13:24] What if, what if something happens? What if he can’t show like we are documenting the truth? Otherwise, now that a hundred thousand dollars that I gift to him as a loan, it could be considered a gift when it’s actually a loan. And now I have to pay gift taxes on that for no reason. So think about documenting everything because if you’re running everything that you do in the right way.
[00:13:44] The documentation advantage is that whoever documents it is the person that is going to get the benefit of the doubt, and the timeline of documentation is really important. Writing the memos, writing the emails, right? Like a lot of old school people, probably you will want to have a phone call to say, Hey, just call me and we can talk through it.
[00:14:01] You know, person to person, like your phone calls are the number one thing that is going to get you in court, right? Nobody cares about your phone calls after your phone call. You need to write it up because if you don’t write it up. It does not work. Now, if it’s really complex transaction, have an attorney look at it.
[00:14:17] If it’s just memorializing the things that have happened, write it up in a document and have everybody sign it. If somebody’s is, is is unhappy signing something, it’s because you either wrote a really crappy document or they don’t, or they’re shady. So fix your document at made it. Make the timeline. Have them adjust the document to tell the truth because nobody has a problem telling the truth upfront in a transaction.
[00:14:35] All these documents are to ensure that the pain doesn’t exist. After we, I’ll tell you something. You don’t, agreements are not agreements. Agreements are just to manage the disagreements. You’re writing an agreement to ensure that there’s no disagreement, right? So you wanna write an agreement in such a way to ensure that there’s no disagreements in the future.
[00:14:57] You don’t wanna write an agreement to talk about what you agree upon now that everybody already understands because you’re already gonna do it right now. You just want an agreement to ensure that there are no disagreements in the future. The entire part of the agreement is to ensure that there are no disagreements.
[00:15:10] Nobody has a problem agreeing with what is there today. People just have a problem agreeing with what’s gonna happen tomorrow, and that’s why you need to. Protect yourself from everything, right? Because the sooner you otherwise, you’re inviting so much hassle into your life. And that’s why this documentation advantage is super, super important.
[00:15:26] Now, by the way, the, it also applies to something as simple as like how you sign a document. Like if you said, if you sign a document, John Smith, that means that you are John Smith, who if you sign a document as John Smith, that means you’re representing yourself. If you sign a document as John Smith, the manager of X-Y-Z-L-L-C, now you’re representing the LLC.
[00:15:48] Therefore, the document and the contract needs to be in the name of the LLC, right? John Smith has the right to sign the docu document on behalf of the LLC, but if you sign it on your own, you are just saying that, Hey, I’m [00:16:00] again giving you one more data point to prove that there is, there is this, this, this unity of interest that I am the same as the other person.
[00:16:09] Small things like this are really important, so that’s why you need your business name on everything, not your personal name on anything, right? It’s super important. Who signs it is like extremely, extremely important. That’s why you have signature blocks in key places. I will also tell you this professional guidance is important because I would not.
[00:16:23] Do DIY, the law, right? Please, please, please, please. Let me tell you this. Your favorite influencer is not an attorney. Your favorite influencer is not an advisor, your favorite influencer. The only thing your favorite influencer cares about is to get more views. That’s it. Your favorite influencers entire business model is to get more views.
[00:16:43] When they get more views, they get more influence because more people know about their stuff and then they get more influence. They can sell you some stuff later. That is the job of an influencer. What are they trying to do to get more views like they want to offer you value? Well, they don’t know Jack about value.
[00:16:57] They’re not an attorney. And in fact, even if they are an attorney, they’re not your attorney, they will tell you that lie, I’m on a YouTube. They’re like, I’m an attorney, but I’m not your attorney. What are they saying? Do your own research. They don’t care about you. Nobody does. Heck, I’m giving you this information, and what am I trying to do?
[00:17:11] I’m not probably getting any views on this, but I’m trying to tell you that I am I, I am. I’m telling you everything I’m doing. I’m not telling you what you should do. I’m saying this is what I do. You should probably consider doing this thing because it may or may not affect you. But the most important part thing here is do not take the word of an influencer that you use online as the gospel.
[00:17:30] I will tell you, nine out of 10, there are some very accomplished influencers online. 100%, nine out of 10 of them do not know what they’re talking about because I have met many of them. They are really good at the hook. They’re really big media teams. They have the gift of the gab and the silver tongue, and they can say and do cool shit all the time, but they do not know how to file an LLC.
[00:17:55] They do not know how to. Work through something procedurally, they may be smart, they may be able to come to the marketing campaign. They may be able to build a funnel for you. They may be able to tell you some, some cool story that they did. They may be able to tell you some negotiation hack. They may be able to tell you like how, how much money they made.
[00:18:08] But that has got nothing to do with you forming your LC to get your legal advice. You have to talk to a professional and an influencer is not an advisor, right? The reason is this ignorance of the law is no excuse. The judge doesn’t care that you did not know. And you cannot point to an influencers video saying that you did not know, but you can point to what an attorney told you or gave you because they will stand by their advice, right?
[00:18:34] The 15-minute call with a small business attorney worth $200 will save you tens of millions of dollars based on how your business grows. And the best part about it is before you show up to an attorney, you just ask the questions, Hey, walk me through. How I do this, walk me through how I send bills. Walk me through how I keep my accounts.
[00:18:51] Walk me and the attorney will give you the perfect way of doing it and then do that. And that’s when you know that you have the right. All I’m saying is influencers are not advisors and attorneys do not listen to them. If they give you an idea, great, take that idea. Run it by your advisor. Take that idea, do more research about it.
[00:19:05] Take that idea to see if it’s the right fit for you. Do your research. Talk to your advisors. Influencers are not advisors. It do not listen to influencers. Right, and I’m not your influencer. I’m a nobody. Do not, I do, do not listen to me, right? I’m giving you an idea. Go do research about it. Lemme give you a rapid fire really quick, right?
[00:19:21] Number one, you gotta treat an LLC as a truly separate entity. Number two, you can’t, you can’t do what they call commingling. You can’t mix business and personal finances. Number three, you gotta maintain operating agreements, even if you’re so, even if you’re just a solo person. Number four, just record all major decisions, even if you’re writing an email to yourself.
[00:19:36] Number five, you gotta use proper. Titles while signing stuff. Number six, please, please, please talk to your CPA on your review. If before you’re filing your taxes every year, if the CPA’s like, Hey, gimme this, this information, you’re like, what can I do to make your, make this significantly easier next year that will protect us against an audit, protect us against any liability?
[00:19:53] The CPA will tell you, the attorney will tell you if you, if you are thinking right now, well, okay, my c, my COO or legal person needs to hear this, please. Just, if you’re not the one handling this day to day, you need to know this, but also send it to the person that is, maybe they already have it all like kind of dialed in for you, that’s totally cool, but at least now just make sure that they understand that they are already dialing this in for you.
[00:20:14] If you like stuff like this, uh, clearly some part of this was enjoyable to people on Twitter and Instagram, et cetera. If you like stuff like this, can you do me a favor? Can you screenshot this and tag me? And that way I can make more like this for you. So please, uh, screenshot this and tag me online. That way I can make more like this for you.
[00:20:29] Thanks for letting me get
[00:20:29] a little spicy on this one.
[00:20:38] Hey, this is Sharran. I have an awesome free gift for you just for listening to the podcast. As you may know, I’ve got a chance to build $2 billion companies the hard way. So if you like this episode, you’ll love getting the exact playbooks from those wins. It’s on my Substack, called My Next Billion. It has the exact frameworks I wish someone had given me when I was figuring it all out. Now you get the real lessons from the trenches as I go for a three-peat and build the next billion. So everything’s free at mynextbillion.com. Please check it out at mynextbillion.com.