More and more people are now creating entities and trusts to organize their assets and provide liability protection. And, Ohio’s recent changes to its laws for limited liability companies has fueled an even more brisk increase in new LLCs throughout the state.
As legal entities are created, an important question must always be addressed. Specifically, what assets should the entity own, and what assets should be owned personally or by another entity? For example, should my personal pickup truck sometimes used in my business be owned by me personally or my business?
Sometimes, people presume that if a business operates a vehicle owned by someone else, the vehicle’s owner will be liable for accidents instead of the business. This presumption is understandable but usually inaccurate. Unless an asset is faulty or otherwise in disrepair that causes an accident, the lawful owner of the property is not usually liable for the mistakes of the operator. In the case of an LLC that operates a rented piece of machinery that is involved in an accident caused by the LLC’s agent, the LLC is usually the responsible party.
Of course, it is always necessary that ownership of each piece of property be clear and written. If ownership of various items of machinery and equipment is possibly shared or not known, someone hurt in an accident may argue that the various owners and operators are in a joint venture or partnership with each other.
Unlike LLCs, partnerships can and do exist without formal agreements. And, general partners in a partnership are often all equally liable for every other partner’s mistakes.
Therefore, when people cooperate together in a business venture or activity without clarity on their relationships or ownership of assets, they can sometimes be considered partners and become liable for each other’s accidents. Thus, it is crucial that different owners of different property formalize in writing their relationships and respective ownership in property.
With that being said, LLCs must own at least some assets. In Ohio, every LLC must be “properly capitalized,” and capitalization is a subjective standard that requires each LLC to possess sufficient money or assets to “operate like a legitimate company.” An LLC that literally has no money and owns no assets will not have the liability protections that LLCs are expected to include.
LLCs that participate in USDA Farm Service Agency programs must also be properly capitalized, but in that context, “capitalization” has a more specific definition. For FSA purposes, capitalization means that the entity owns significant assets that are at risk of loss as a part of the regular farming operation.
How much property or money must an LLC possess? Simply put, an LLC must be capitalized under the appropriate subjective standards. Once the LLC is effectively capitalized, the LLC can rent assets from other entities, thereby potentially decreasing risk of loss.
Nonetheless, whenever any person or entity uses another’s property, there should be a written agreement between those parties so that a partnership is not unintentionally created.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-523-5523. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.