How Do I Fix My LLC Before I Get Sued?

Your LLC is broken. Maybe you filed it years ago and forgot about it. Maybe you’ve been co-mingling funds. Maybe you don’t have an operating agreement, or you’ve missed filings and don’t even know it. Here’s the good news. You can fix your LLC before you get sued. Before opposing counsel starts digging. Before a judge decides your LLC is worthless. I’ve prosecuted and defended these cases, alter ego claims and LLC violations, and I’ve helped entrepreneurs fix their companies before disaster struck. This is the remediation playbook. The factors courts actually weigh, and the specific mechanisms to cure each one.

How do courts decide whether to pierce an LLC?

When a court decides whether to pierce your LLC, it runs a balancing test. It looks at multiple factors, weighs them against each other, and makes a judgment call. There’s no bright line and no magic number. No honest lawyer can tell you three factors and you’re fine, four and you’re pierced. This area of law is subjective. What the court is really asking is simple. Does this look like a real, separate business, or does it look like a shell you created to hide behind? The more factors that look bad, the worse it looks. The more you’ve cured and documented, the stronger your position.

Factor 1: How do I fix my operating agreement and records?

This is the easiest factor to prove against you, because it’s black and white. Courts want to see a governing document and proof that you actually follow it. Ask yourself. Do you have a written, signed operating agreement? Does it reflect how the business runs today? Have you documented major decisions with written resolutions? The cure: get an operating agreement in place, then go back and ratify past decisions with a ratification resolution that confirms the action taken on a given date. Every major move, adding a member, a buyout, taking on debt, a large purchase, gets a signed, dated resolution filed in your records. It’s not as good as doing it right the first time, but it’s far better than nothing.

Factor 2: How do I establish separation of identity?

This is where a lot of owners get sloppy. Courts look at whether you and the LLC are truly separate, or whether you’ve blurred the line so badly that the company is just you. Same address as your home with no separation, same phone for personal and business, signing contracts in your own name, running multiple businesses out of one LLC, these are all problems. The cure: if you work from home, designate a business space and get a separate business mailing address and phone number, they’re cheap. Make sure contractor and employee agreements are with the LLC and paid by the LLC. Sign every contract, invoice, and proposal as the LLC, by you as managing member. Every touchpoint should reinforce that the company is separate.

Factor 3: How do I clean up financial separation?

This is the most dangerous factor, because it leaves a paper trail. When I subpoena your itemized bank records, your books, your tax returns, and sometimes your phone records, I see everything. The cure has two parts. First, complete separation going forward. Business account for business only, no exceptions. Second, go back and categorize every transaction. Personal expenses the LLC paid can be documented as either distributions to you, if your operating agreement allows them and you treat them consistently for taxes, or as loans from the LLC to you, with a written promissory note, a reasonable interest rate, and actual repayment. Do it by resolution so it’s documented. Going forward, pay yourself through documented distributions or a reasonable salary. Clean books tell a story of separation. Messy books let opposing counsel paint a picture of alter ego.

Factor 4: How do I fix undercapitalization?

Courts ask whether the LLC had enough capital to reasonably operate and meet its obligations. Is it running on real operating capital, or constantly running on empty waiting for you to inject cash? The cure: document all capital contributions in your books and your operating agreement, keep adequate reserves so the company can meet its expected obligations without you personally stepping in, and if the LLC borrows from you, paper it with a promissory note and actually repay it. What kills you is an entity that was never funded and used to shield a business that should have had real capital. If you genuinely started on a shoestring, document that, so if anyone later claims you undercapitalized on purpose to dodge liabilities, you can show it wasn’t bad faith, it was simply all you had.

Factor 5: How do I get current on state compliance?

Every LLC follows its state’s law, and if you don’t follow the regulations, the LLC won’t protect you. Is your company in good standing right now? Go check. Are you current on annual reports and franchise taxes? Do you have an active registered agent? The cure is straightforward but critical. If you’re behind, get current immediately, file the missing reports, pay the fees, and reinstate if you were dissolved. Build a compliance calendar and never miss another filing. Here’s what most people miss. When your LLC is dissolved, you may have been operating as a sole proprietor or general partnership without knowing it, which means personal liability for everything during that period.

Factor 6: How do I document related-party transactions?

This is where sophisticated compliance separates the amateurs from the protected. If you have multiple entities, are transactions between them documented at arm’s length, or does money just flow back and forth with no paper trail? The cure: every transaction between related parties needs documentation. If your LLC pays another LLC you own, there’s an invoice or a service agreement. If you provide services to your own LLC, there’s a management or consulting agreement, even with yourself. If the business uses your personal equipment or property, there’s a lease and the LLC pays rent. When every transaction is documented, you’re showing that you respected the boundaries between entities. That’s evidence of real separation, and real sophistication.

Is it too late if I’m already cutting corners?

Courts weigh all of these together. One weak factor with everything else strong, you’re probably okay. Several weak factors, and the picture gets bad. But here’s what matters. If you’re reading this and actively curing your deficiencies, that goes a long way. Courts appreciate good-faith, reasonable efforts. They understand entrepreneurs aren’t perfect. What they don’t forgive is someone who created an LLC and completely ignored it. You’re here. You’re taking action. That puts you ahead of most.

Your remediation checklist

Adopt an operating agreement and ratify past major decisions by resolution.

Establish real separation of identity: business address, phone, and signatures in the LLC’s name.

Clean up financial separation and document personal expenses as distributions or documented loans.

Capitalize the company properly and document every contribution.

Get current on all state filings and build a compliance calendar.

Paper every related-party transaction at arm’s length.

Bottom line

Going through these factors yourself is eye-opening. Assess where you stand and implement the fixes now, before it’s too late. The center of all of it is a real operating agreement, the one factor that’s both easiest to prove against you when it’s missing and easiest to win when it’s there. If you want one built to actually hold up, that’s what The Ultimate Operating Agreement is for. Defense wins championships.

Frequently asked questions

Can I fix my LLC after years of neglecting it?

Yes. You can adopt an operating agreement, ratify past decisions by resolution, clean up your finances, recapitalize, and get current on filings. Courts reward good-faith remediation, what they don’t forgive is an LLC that was created and completely ignored.

How do I document past commingling I’ve already done?

Categorize each personal expense the LLC paid as either a distribution (if your operating agreement allows and you treat it consistently for taxes) or a loan with a written promissory note, reasonable interest, and actual repayment, documented by resolution.

What if my LLC was administratively dissolved?

Get current and reinstate immediately. While dissolved, you may have been operating as a sole proprietor or general partnership, meaning personal liability for everything during that period. Then build a compliance calendar so it never happens again.

What’s the most important LLC fix to make first?

A real operating agreement you actually follow. It’s the easiest factor to prove against you when missing and the easiest to win when present, and it anchors the rest of your remediation.

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About the Author — Karam Nahas, The BattleTested LawyerTM. A 20-year courtroom veteran who has handled over $1 billion in deals and real litigation, Karam founded Legally BulletproofTM to give entrepreneurs the same legal defense systems big companies use — without big-law prices.

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Educational content, not legal advice.