Does an LLC Protect Personal assets: Everything You Need to Know
Does an LLC protect personal assets? Yes. It does this by creating a buffer between your personal assets and the liabilities of the business. It is protection from things that can happen during the course of the day involving your business.3 min read
2. Cases When an LLC Cannot Protect Your Assets
Updated October 29, 2020:
Does an LLC protect personal assets? Yes. It does this by creating a buffer between your personal assets and the liabilities of the business. It is protection from things that can happen during the course of the day involving your business.
Information About LLCs Protecting Personal Assets
- When you run an LLC, if someone has a judgment placed against your business, the only assets they can go after are the funds in the business bank account or the business property.
- Personal bank accounts or property are not part of any legal issues regarding the LLC. Your car, any investments, or other businesses you may have are not affected by legal action whether the business is going bankrupt or being sued.
- For LLCs properly structured from the start, a lawsuit will only affect the assets of the business.
- Lawsuits are something a business must be prepared for due to interacting and processing transactions with the public. A lawsuit can be devastating financially due to legal fees.
- It is understood that someone who is considering starting a business would have second thoughts about doing so if they had to put their personal assets on the line. This would lead to fewer new businesses.
- Because states do not want to hinder the formation of new businesses, limited liability of certain business structures, such as LLCs, protect owners and managers of the LLC from being held personally responsible for obligations, debts, or any misdeeds done by the business.
- Of all the business types, Limited Liability Companies offer the most protection.
- A term to be aware of is "piercing the veil of liability protection." This means if the LLC isn't established and maintained as a business a court, at its discretion, can disregard the LLC, which would then allow creditors or a plaintiff to go after personal assets.
- Once you've been sued, it is too late to form an LLC to protect your personal assets. Make sure to form the LLC in advance.
- Limited liability protection does not cover willful misconduct or criminal acts. It does offer protection, to some degree, against government creditors like the Internal Revenue Service. An exception is an LLC's manager or member can be deemed personally responsible if payroll taxes are not paid. Should you fail to pay the taxes, your personal assets will be at risk.
Cases When an LLC Cannot Protect Your Assets
There are situations when the LLC does not protect personal assets. The following are a few examples.
- You will be liable if you provide a lender your personal guarantee for a business loan. By doing so, you are agreeing to pay back the loan even if the business fails.
- When signing such an agreement, you have given up your rights to limited liability protection and will be held responsible for paying the debt.
- It is in the best interest of an LLC owner to avoid signing any paperwork, such as a line of credit from the bank, a commercial lease, or a loan for a vehicle to be used for the business that stipulates a personal guarantee.
- Signing a contract using your own name instead of the name of the LLC can make you personally liable.
- Not checking any business contracts or agreements can lead to a careless mistake. Always check that you are signing as a representative of the business, not as an individual.
- If you sign just your name on a contract or other business agreement, you are liable for paying the debt.
- If you sign your name and your title such as CEO of LLC name, that makes the business liable for paying the debt.
- If you use a personal credit card to purchase something for the business, it is your responsibility to ensure payments are made, not the LLC's.
- Check the terms of your credit card agreement regarding liability. Even if your business name is on the card it does not guarantee you won't be held personally liable.
- If you break the law, an LLC will not protect you. This includes misrepresenting yourself. It also includes lying on credit or loan applications for the LLC.
- An injury to someone due to a service your business provides such as accounting, as a driver, or as a doctor leads to personal liability for negligence or malpractice claims.
- LLCs must be maintained and be in compliance with state laws such as filing an annual report on time.
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