LLC Liability Protection: Everything You Need to Know
LLC liability protection is one of the main reasons that owners decide to become an LLC. 3 min read
2. Advantages of LLC Liability Protection
3. Frequently Asked Questions About LLC Liability Protection
4. Steps to LLC Liability Protection
What is LLC Liability Protection?
LLC liability protection is one of the main reasons that owners decide to become an LLC. Owners benefit from the ease of being a pass-through entity with some added liability protection. If you form an LLC and do not personally guarantee to pay the LLC's debts, you will not be held personally liable. This means that creditors can go after the LLC's bank accounts, but not your personal bank account. Conversely, the LLC's assets cannot be taken by creditors to pay an owner's personal debts.
Creditors know about this possibility and may demand that you personally guarantee the debt so you will be responsible for unpaid LLC debts. Instead, creditors can try to use other tactics to get repayment from an owner of an LLC. This doesn't include taking property directly.
LLC status protects owners against the wrongdoings of other owners. For instance, if the LLC is found liable, the LLC owner that did not commit the act will not be held responsible. The LLC owner that got in trouble loses some of the LLC protection and could be held personally responsible.
Advantages of LLC Liability Protection
LLCs are less complex to start and run than corporations.
Frequently Asked Questions About LLC Liability Protection
I have a sole proprietorship. Can I turn it into an LLC?
Recent changes in the laws regarding LLCs in every state make it possible to start an LLC with just one person. All you have to do is fill out the correct paperwork and submit it to the right office to turn any business type into an LLC as long as it fits the requirements.
The forms that you need to fill out to form an LLC are generally available through the government office of each state that handles LLC registrations. It will often be a template for the Articles of Organization that you need to develop, which you can fill out within minutes.
What information do I need to file to form an LLC?
To form an LLC, you will need to file your Articles of Organization with the following information:
- Your LLC's name and address
- Contact information for your Registered Agent
- In some cases, the names and addresses of any shareholders
Are there any limitations to the protections that an LLC provides?
Although LLCs are regulated differently in each state, every state has the same core limitation exceptions. For an LLC, there are limits to the protections that it offers and that limit is based on your actions. If you use the LLC to commit a crime like fraud, you can be held responsible for your actions.
Otherwise, your LLC should be able to protect your personal assets if there is legal trouble where you did not commit a crime. You and your LLC will be judged separately in those cases. If you are found guilty, you and your LLC could have to pay the costs together. However, you can offset those costs with liability insurance.
What happens if I'm a member of an LLC, I borrowed money, and I cannot pay my debts?
If you have a liability that you cannot pay and you are a member of an LLC, your stake in the LLC could be used to pay your debts. In this case, your creditor could assume your rights to making money from the LLC. In other cases, legal action can be taken against your LLC. If your LLC is dissolved by the court, then you must stop all LLC operations and immediately begin to liquidate its assets to pay your creditors. This is a common provision in LLC regulations for all states where a creditor can seek your LLC payment rights to pay your debt.
Steps to LLC Liability Protection
1. To receive LLC liability protection you must first form an LLC by filing the LLC's Articles of Organization with the state government.
- This typically happens through the division of corporations at the secretary of state's office.
2. Pay applicable filing fees, ranging from $100 to $800, depending on the state.
3. Write an operating agreement for the LLC that sets out member rights and responsibilities.
- Make sure to include information about ownership shares.
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