When forming a business entity, you should consider your personal liability. A limited liability company is one of the best ways to protect your personal assets. But is that protection absolute? You’d be forgiven for thinking that your assets are safe in all instances, but there are steps you should take to maximize the LLCs ability to keep you safe. Let’s take a look at some of the most crucial steps you should take:
Understanding an LLC’s limited liability protection
When forming an LLC, you’ll establish a new business entity that’s legally separate from its owners. This separation is what provides “limited liability protection.” An LLC owner only risks the amount of money they’ve invested in the business, but there are always exceptions. The owner’s personal possessions (cars, homes, bank accounts) are off-limits. As a general rule, if the LLC can’t meet its obligations, creditors can pursue the LLCs assets, properties, and bank accounts. The exact nature of the business’s liability is outlined in the operating agreement.
Owners are still liable for certain debts, such as those they’ve personally guaranteed. Owners can be held liable for unpaid payroll taxes and can be held liable for their own personal wrongdoing.
Though there are limitations, liability protection is an excellent feature of LLCs and plays an important part in asset protection. Here are some tips to ensure you get the most out of your new LLC:
Obtain LLC Insurance
Your LLC doesn’t protect you from personal liability, so you should consider LLC insurance. Your personal liability is at risk if you’re accused of negligence, wrecking a company asset, or defrauding a customer. The judgment in a personal injury lawsuit can be particularly devastating. Having watertight liability insurance is a good idea to prevent unexpected payouts. Liability insurance can also protect your LLCs finances.
Avoid mixing assets
In corporate law, if you mix your personal assets with corporate ones, the line between the two becomes blurred, and you may be held liable as an “alter ego” of the corporation. There are some indications that this could be extended to LLCs, nobody wants to be the first person this applies to, so you should keep LLC records and finances totally separate from all shareholder’s personal finances. This is an area that often catches out small business owners.
The LLC should retain its own finances, bank account, and credit cards. Contracts, invoices, purchase orders, and legal documents should be kept in the business name and signed on behalf of the LLC. The LLC’s name should be used for all business activities. Everyone you do business with should know they’re dealing with an organization and not with you personally.
Establishing LLC credit is important but may be difficult for most business owners; personal guarantees are a significant factor in owners becoming personally liable for company obligations. If you personally guarantee a loan or lease, you agree to make payments if the LLC defaults. You could even be asked to secure the loan against your loan, car, or another major asset for a business loan. If the LLC folds or defaults, the creditor can go after your personal assets to meet the debt obligations.
If your business is newer, you’ll probably need to guarantee larger transactions. But you should establish credit as quickly as possible, pay your LLC bills on time and show a good track record of revenue and profit. Your LLCs finances should be able to stand alone, separate from yours.
Keep “just enough” money in the company
If your LLC is sued, your LLC’s assets can be used to satisfy a creditor, but your personal assets can’t be (with some exceptions). To keep vulnerability to a minimum, you should keep as little money as possible in the LLC and pay the rest to owners to be kept as personal assets.
There are a few limits, however. If you’re already the subject of legal action and transfer money out of the company, this transaction could be regarded as fraudulent. If you don’t keep enough money in the company to meet its expenses, a court may hold you liable (alter ego theory) for under capitalizing in order to defraud creditors. It’s a fine line and must be managed carefully, you should consider legal advice.
Asset protection planning
As has been mentioned, your personal assets may be at risk for your LLC obligations if you’re sued for personal wrongdoing. Depending on your state’s regulations, there may be ways to protect some of your personal assets from these types of claims. In some states, you can place your assets in a trust to protect them from creditors, but it’s worth noting that this must be done before there are unpaid debts or judgments.
Some assets, such as pensions, retirement accounts, and your primary residence, may be automatically exempt. Other real estate and property may be open for the taking, however. You can consult with a bankruptcy attorney or estate planner to determine the best ways to structure your assets in a way to reduce or shield you from liability for your business obligations. Asset protection LLC strategies can protect your personal assets from business creditors; while there’s no such thing as 100 percent protection, careful planning reduces the risk.
Will an LLC protect my personal assets?
In conclusion, yes, usually.
LLCs typically protect you from personal liability, but there are some exceptions. LLCs are the best business structure if you’re trying to maintain your business as a separate legal entity.
If you’re being sued for personal wrongdoing, you lose protection. You should also be careful not to behave in a way that contravenes business regulations or state law, such as moving money out of your business solely to avoid a creditor claiming it.
You can make the most out of your business status by keeping your personal and business finances separate, keeping just enough money in your LLC to meet reasonable expenses, and taking out a liability insurance policy for yourself and your business.