LLC: Vacating a commercial lease — what happens?
I’m about to sign a 2-year commercial lease in which ONLY the LLC is liable. However, I buy rx drugs without prescription am hesitant to do so because I’m just starting out in business. I asked for a 1-year lease with an option to renew, but the landlord wants two years.
Other than forfeiting my deposit, would I also have to go to court, pay attorneys’ fees, etc. if I vacated my lease early? Would it be a small claims court or JP court or something else?
How do they determine if you "comingle" your LLC with personal funds? Like if I ever used my LLC debit card for some purpose other than business? Would THAT be comingling? If I did that, would I then personally be liable? How would the court determine that?
What exactly happens if you are an LLC?
It is very unlikely that only the LLC will be liable. It is more common that you will be asked to "guarantee" the debt of the LLC. That means that if you walk away from the lease, both the LLC and you personally will be on the hook.
Generally, if you walk away from a lease, the landlord can sue you for the entire remaining period. So, if you leave five months into a 2 year lease, you can be sued for 19 months of rent. However, the landlord must "mitigate" by trying to find a replacement tenant. If he does, you would not owe for months that the new tenant pays. If your lease says the winner gets attorneys’ fees, then the winner gets attorney fees.
When you are sued, the court that you will go to depends on the amount you are being sued for. In CA, small claims is up to $7500. Over that is Superior Court. Your state may have different limits and a different court structure.
Using the LLC debit card for personal purchases is one example of commingling. If you commingle enough, a court may decide that the LLC is your "alter ego" and not a separate entity at all.
Before you sign the lease, take it to a business lawyer in your area and ask all of these questions. As a new business owner, you need to have a good understanding of all of these things to be successful. An hour of an attorney’s time will save you thousands later.
You formed an LLC without knowing anything about it? Go to the attorney who filed this for you and ask. You can’t comingle company funds with private funds at any time or you are going to have problems.
I could spend a lot of time explaining the pros and cons of a lease agreement but you need to find out what you are involved in with the LLC FIRST.