LLCs are a business structure where the owners are afforded separation from their business. Forming a limited liability company (LLC) offers you liability protection from the debts and liabilities of your business. This means that if your business is sued you will be given protection for your own personal assets. Rather than have creditors come for your home, bank accounts, or personal items, they would be untouchable. You would only be at risk for what you have put into the company. Limited liability companies offer this benefit that is given to corporations as well, but also offer some benefits from that of a partnership or sole proprietorship.
How an LLC Protects Your Assets
When you form an LLC, you are creating a new business entity. This is formed completely separate from its owners, and it offers you limited liability protection. As a general rule, if an LLC can’t pay its debts, then the creditors cannot go after the owner's bank accounts or assets. Instead, LLC’s creditors can only go after the LLC’s bank account and other assets.
What does an LLC not protect you against?
When it comes to personal liability, an LLC will not protect against this. This means that due to your own negligence, malpractice, or other personal wrongdoing, that you commit related to your business, you cannot shield your assets This is why it is essential to hold liability insurance.
Improving Limited Liability Company Asset Protection
Strategies to Improve LLC Asset Protection
- Purchase Insurance: By having insurance you can also limit your liability when it comes to negligence or personal mistakes that you make in relation to your business. Although your LLC may not protect you from everything, having insurance will.
- Elect Corporate status: LLCs are able to elect the tax status it wishes to hold. This means that as an LLC you can elect corporate status.
- Independent Entity: In corporate law, shareholders that mix personal assets with corporate assets are held liable for anything that may occur. This can also occur with LLCs. To avoid this, keeping LLC finances completely separate and as a separate entity is necessary. Your LLC should have its own bank account and credit cards, as well as contracts, invoices, purchase orders, and other important documents that should have the name of the LLC on them.
- Establish credit: Having personal guarantees for a company is one way that you can become liable for company debts. If you guarantee something such as a lease, or even a loan, then you would be agreeing to pay these should the LLC not be able to. Essentially you will be a guarantor. In some cases you may even be asked to pledge your assets. Avoid this by obtaining credit for your business alone. You can do this by paying your bills on time and showing a track record of real revenue and profit.
- Use Trusts: If your LLC is sued, then any money that is in the LLC can be taken by the creditor. The purpose of the LLC is essentially to ensure that a creditor cannot access your personal assets. To minimize your risk, you should keep as little money in your company as possible, and pay the rest either to the owners, or a trust.
It is important to note a few limitations on this. If you owe a creditor and transfer money out of the company, then the transaction may be taken as fraudulent. If you do not keep enough money in the company in order to pay the expenses, the court may hold you personally liable regardless. This will eventually lead to undercapitalization of your business and even possibly a lawsuit seen as an effort to defraud business creditors.
Form an LLC
When looking into how to form an LLC there is a specific process that a lawyer can help you with. The lawyer can help to ensure that you are in compliance with all state laws. First, you will need to give your LLC a unique name, then follow up by choosing a registered agent in the state of formation. This person will need to have a physical address in the state of formation. This is to ensure that they can accept due process should your business get sued.
Next, you will need to begin filing the articles of the organization. This establishes the existence of your LLC. You will also need to pay a filing fee, which will vary based on the state you are forming in. This should be followed up by your operating agreement. The operating agreement will outline the ownership of your LLC, as well as operating procedures. This ensures that should something occur, all business owners are on the same page. It reduces the risk of future conflict.
Finally, you will need to obtain an EIN, similar to a social security number for your business, and open a bank account. Soon enough you will be ready to start doing business legally as an LLC.
Should I Hire a Business Lawyer?
Hiring a business lawyer ensures that you stay in compliance. Rather than stress to understand what you need to do and hope that it works out, a business lawyer is well versed in the laws.