LLC Liability: Everything You Need to Know
LLC liability is limited because it is considered a separate business entity that can have its own assets, debts, and contracts. 3 min read
What is LLC Liability?
LLC liability is limited because it is considered a separate business entity that can have its own assets, debts, and contracts. If the LLC is delinquent on its debts, the creditors can go after LLC's assets, not the owner's. LLCs have less tax liability since they are considered pass-through entities. Despite these liability protections, LLCs owners still have some liability for their business transactions.
Advantages of LLC Liability
2. LLCs are easier to run than corporations.
3. LLC owners are protected from business debts and claims.
5. LLCs are taxed as pass-through entities.
Frequently Asked Questions About LLC Liability
What limits does an LLC place on liability?
LLCs provide similar liability protections as corporations in that they shield your assets from legal processes. In short, your LLC can be sued but you cannot. There are limits on your liability protections. In an LLC, the owners (or members) receive the liability protection. In general, they are not liable for the business' obligations. However, if criminal actions were committed through the business, then the protections that the LLC provides are void, and you can be sued and lose your assets.
A good example of this is paying rent. If your LLC cannot pay its rent and gets evicted from the location, the landlord can sue the LLC, not you. As long as a crime wasn't involved in the failure to pay the landlord, your assets are safe.
When are the liability protections from an LLC void?
The protections that your LLC gives you can be voided if there is criminal action involved, or you are at fault. Some examples of this include:
- You caused an injury.
- You made a personal guarantee on a loan.
- You don't pay the taxes that your LLC help from employee wages.
- You knowingly commit a crime.
- You use the LLC to handle personal financial issues.
Is an LLC a separate entity?
For tax purposes, an LLC is not a separate entity. The IRS will count it as a pass-through entity. The rest of the time, the owners should treat it like it is a separate entity. If not, a court could order that your business is not being used properly and could revoke its status.
What should my insurance policy cover?
If you have a liability insurance policy. It should cover you and your business for normal operations. That way, you are covered for most situations that you will encounter.
What is the level of financial liability that a member has in an LLC?
Members are always liable up to the amount of the financial investment that he or she put in. That means that if you started a company and invested $10, you would only have to cover its debts up to $10. As a member of an LLC, you are also not liable for the LLC's debts. However, creditors can pursue your personal assets if you have violated the rules for LLCs.
What happens when an LLC is deemed to not be an LLC?
If a judge rules that an LLC is not treated like one, then he or she can order the LLC be closed. This usually happens when a judge determines that the LLC is being used like a shell company. In this case, the LLC will not receive the benefits and protections of LLC status.
What does it mean to “pierce the corporate veil?”
In general, state and federal laws protect the owners of corporations, LLCs, and other separate business entities from being sued personally for actions of the entity. Their personal assets remain separate from the business. However, there are certain actions that can cause this limited liability protection to end. For example, if the LLC owner injures someone personally or if they disregard the corporate form of the organization, they may lose protection. Similarly, if the owner signs a personal guarantee on behalf of the LLC because a lender required it during the application process for the LLC to get the funding that they need, they may also lose protection.
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