Asset Protection LLC: Everything You Need to Know
The asset protection LLCs provide is one of the biggest reasons business owners choose that type of entity.4 min read
The asset protection LLCs provide is one of the biggest reasons business owners choose that type of entity. One of the first steps any business owner should take is to form a limited liability company to protect their personal assets from seizure by business creditors.
Businesses that are formed as LLCs are legally separate from their owners. The acronym LLC stands for "limited liability company." Creditors to whom an LLC owes money can seize the assets of the LLC, but the owners' personal assets remain safe, including their personal property, vehicles, and bank accounts. The only money an owner risks losing is the amount they have invested in the business.
Limiting Asset Risk Even Further
Even with the legal protections an LLC provides, there are always exceptions. For example, if a business owner has personally guaranteed a debt related to the business, they are still responsible for it. They may also be liable for payroll taxes that are unpaid or for litigation due to their own wrongdoing. Therefore, LLC formation should only be considered a part of your overall plan for asset protection.
To enhance an LLC's protective qualities, you should make sure to keep your personal finances separate from business accounts and make sure business insurance policies are maintained. This can reduce your risk substantially.
Making plans to protect your personal assets should take place long before any judgement arises against your LLC. If it's done after the fact, it may be proven in a court of law that your arrangements are fraudulent.
Also, consider that you may be protecting the business from the actions of its owners. If you or other members have personal problems such as accidents, credit card debt, divorce, and other misfortunes, a court can litigate against you and end up seizing your interests in the business, forcing it to dissolve.
Asset Protection Strategies
There are several ways a business owner can proactively protect their assets. These include the following:
- Obtain LLC insurance.
- Run the LLC as an independent entity.
- Establish credit for the LLC.
- Keep just enough money in business accounts.
- Choose corporate status for the LLC.
Most businesses need insurance policies to protect themselves from liabilities, regardless of their entity. Insurance protects you and your company from lawsuits alleging negligence, fraud, or other wrongdoing. Without this insurance, the result of losing such a case can be catastrophic. Consult a professional insurance agent or representative to determine the amount of insurance you need for your own unique business situation.
Run the LLC as an Independent Entity
No matter what your business is, or how many owners it has, it's always a good idea to separate personal assets from business ones. Mixing assets risks your business being considered an “alter ego” or a sham, resulting in personal liability. Make sure to keep clear and complete records of all financial transactions and accounts proving that the two do not mix. Your business needs to have its own bank account and credit cards. Every document should bear the LLC name on it and be signed on the LLC's behalf.
Establish Credit for the LLC
One of the most common reasons owners of small businesses are considered liable for the obligations of their companies is personal guarantees. If the LLC cannot make payments on a loan or a lease, you end up responsible for it instead. You may even be forced to use your own home or another valuable asset as collateral. This happens often with newly established businesses. However, by paying bills on time and keeping good financial records, you can establish credit solely in the name of your LLC.
Keep Just Enough Money in Business Accounts
In the event that your LLC is party to a lawsuit, whatever money is currently in its accounts may need to go toward the judgment, creditor, or fees. If the LLC is set up and maintained properly, your personal accounts are not at risk. Therefore, you may want to keep as small an amount as possible in the company bank account, paying the rest to the LLC's owners. However, keep in mind that if you do not keep enough money in the account to pay your loans or other expenses, you could be accused of fraudulently under-capitalizing your business.
Choose Corporate Status for the LLC
The IRS allows an LLC to choose to be taxed as a corporation. This requires more complicated filing and administrative procedures and can result in higher taxation. It can, however, further shield your personal assets from debt and other liabilities.
If you need help with asset protection for your LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and. Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.