Learn more about how LLC liability protection can help protect your personal assets in case of a lawsuit or other legal action.
One of the chief benefits of forming an LLC, known as a limited liability company, is the personal liability protection it can provide. As a result, many business owners may opt to form an LLC to protect assets and help shield themselves from potential liability.
By forming an LLC, you’re creating a unique legal entity separate from its owners, also known as members. This situation means that in the event of a lawsuit or other legal action against it, only the LLC’s assets are at stake and not those of its members. If you’re looking to form an LLC of your own and want assistance, consider using our LLC formation service.
In most cases, forming an LLC can protect your personal assets from theliabilities and debts of the business. When forming an LLC, regardless if it’s a single-member LLC or multi-member LLC, you’re establishing a new legal entity separate from its owners.
This separation provides members’ assets with what is known as limited liability protection. This situation means that, in most cases, only the assets of the LLC are at risk, not those of members. This is one of the main advantages of an LLC over a sole proprietorship.
While forming an LLC is a great way to help separate and protect personal assets from legal actions, it’s not a perfect system, and there are exceptions. A key example of when an LLC doesn’t shield personal assets is when the owners have personally guaranteed a debt for the LLC.
There may be a potential liability if the owners are sued for personal wrongdoing or negligence during the LLC’s operation. In this situation, a judgment against them could expose their assets to judgment or risk. Furthermore, if there are unpaid payroll taxes, the owners may be personally liable for paying those, as well.
A key reason that people opt to form an LLC is to take advantage of the asset protection an LLC can provide. But, in addition to the liability protection the LLC entity itself provides, you can sure up your personal asset protection by developing an effective LLC asset protection strategy, helping minimize the risk for members.
Some of the key components of creating a solid LLC asset protection strategy include employing the following:
Unfortunately, no business or operation is perfect, and accidents and mistakes can and will happen. When they do, you want to ensure you have an appropriate level of business insurance to protect your organization and owners from potential liability. Having the right business and liability insurance in place can help protect personal and business assets from incidents occurring during its operation and functioning.
You should note that the premiums are recurring expenses and may be costly. However, it’s far more cost-effective to pay for insurance over the long term and be prepared than not to have it and face a sudden, costly incident.
There is a legal precedent established that contends some LLC owners could lose limited liability protections under what is known as an “alter ego” theory. This is where the owners fail to operate the LLC as an independent business properly and have their status and protections revoked.
To prevent this and maintain liability protection, members must operate the business as a legitimate independent entity. Mixing personal and business duties and assets or failing to maintain separate personal and business bank accounts could lead a court to declare your LLC invalid and remove your liability protections.
While not an option for everyone, consider placing personal assets such as your home, stocks, and other property into an irrevocable trust. In this type of trust, the trust owns the assets, and an independent trustee administers it on behalf of designated beneficiaries.
While you’re losing some control of your assets in this situation, it offers a unique level of asset protection. In most cases, these trusts are protected from creditors and can benefit beneficiaries in the future. Laws and requirements regarding trusts can vary greatly from state to state, so consult an estate planner for assistance before proceeding.
If you need a loan for your LLC, especially if it’s a new business, it’s unlikely that a bank or other party will give the LLC a loan. That’s why some LLC owners will make a personal guarantee to repay the loan with their personal savings or other assets. But you need to understand that, once you’ve made a personal guarantee, having an LLC won’t prevent you from having to repay that loan with your personal funds.
One possible way around having to make personal guarantees is to establish a credit history for the business as soon as possible. Get a business credit card so that you can demonstrate the LLC’s ability to pay its own bills without help from you or the other members. That will increase your odds of getting a business loan for the LLC without having to put your own assets on the line.
If you’re thinking of starting your business as an LLC or an LLC with S corp status to protect your personal assets, we offer a comprehensive LLC formation service alongside a suite of services and products designed to help you hit the ground running with your business.
Simply put, we have the solutions and support needed to help your organization thrive, and we can even help you get started today for as little as $0 down. So reach out today by calling 1-844-493-6249 or visiting us online to get started on your path to success.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
In most cases, an LLC does not protect personal assets from IRS action, only certain legal actions such as lawsuits and creditor debt collection.
An LLC can protect your assets, such as your money, by providing limited liability protection against lawsuits and other legal actions like debt collections.
While it can protect personal assets in most cases, there are circumstances where owners can be personally liable in an LLC. This includes unpaid payroll taxes, as well as the owners being sued directly for wrongdoing or other negative conduct.
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