Protect LLC: Everything You Need to Know
In order for LLC owners to protect themselves from liability arising from their limited liability companies, they must separate LLC assets and finances from personal belongings and avoid keeping excess money in the LLC. 4 min read
In order for LLC owners to protect themselves from liability arising from their limited liability companies, they must separate LLC assets and finances from personal belongings and avoid keeping excess money in the LLC. Buying LLC insurance and avoiding personally guaranteed LLC loans can also go a long way in protecting LLC owners from liability.
Limited Liability Is Not Absolute Protection
An LLC can protect all its owners and managers from personal liability arising from the business. For example, if an LLC fails to pay its landlord, supplier, or lender, the creditor cannot sell the LLC owners' personal properties to cover the debt. Technically, the only money and assets the LLC owners risk losing to the creditor are those already invested in the business.
However, this personal protection against liability arising from LLCs is not absolute. LLC owners can be held personally liable in the following situations:
- If they injure a person directly.
- If they personally guarantee a loan for the LLC.
- If the owners do not pay payroll taxes withheld from employees' wages.
- If the owners are involved in fraudulent or illegal activities.
- If their recklessness causes harm to the company or another entity.
- If they fail to separate personal finances and assets from the LLC's operations.
It is worth noting that liability protection extends to innocent owners who are not personally involved in the above violations.
How LLC Owners Can Protect Their Assets
LLC owners can assist in protecting their assets by following these routine management practices:
- Make a sincere operating agreement. The agreement should state the rights and relationships of the owners. LLC owners should endeavor to follow the agreement such that their actions are within their rights. Courts can hold LLC members found to be acting outside their rights personally liable for those actions.
- Promptly file annual documents. Follow all the annual federal and state filing requirements, including tax returns, annual statements, and franchise fees. Some states can withdraw liability protection from members of LLCs that are not in good standing. LLCs can lose their standing if they fail to file the required annual documents in time.
- Keep accurate records. Although not all companies need advanced bookkeeping software tools, all LLCs need to keep impeccable records. Such records can prove to be a protection when claims of using the LLC as an extension of personal businesses arise.
Other Measures to Protect Assets
Get LLC insurance. The LLC does not protect its members and managers from liability arising from defrauding customers, negligence, and personal injury. An LLC insurance policy that protects both the owner and the LLC comes in handy in such situations.
- Keep LLC finances, records, and assets separate from personal belongings. Failure to separate company property properly from personal belongings can void the personal liability protection guarantee. Therefore, it's important for the LLC to maintain separate bank accounts and credit cards. LLC owners should also make sure all LLC contracts, invoices, and purchase orders have the LLC's name on them and are signed on behalf of the company.
- Avoid personally guaranteeing loans. When the owners of an LLC guarantee that they will pay an LLC's loan if the company fails, the owners are exposing their personal property to the creditor. It is better to help LLC establish its own credit and qualify for loans. This can be done by paying bills promptly and building a good profit track record.
- Don't keep excess money in the LLC. Owners should be wary of keeping excess money in the LLC. It is wise to pay out excess funds to the owners such that the LLC retains just enough money to keep it running. If creditors sue the LLC, any money that belongs to the LLC can be used to cover the debt. Owners should be careful about the timing of money transfers from the LLC. If money is transferred out at a time when the LLC already owes a creditor, courts can regard such a transaction as fraudulent. On the other hand, failure to keep enough money in the LLC to take care of expenses can also be considered fraud.
With the help of experienced bankruptcy and estate planning lawyers, LLC owners can preempt the loss of personal assets. These measures can only provide protection if implemented well before the LLC gets into problems.
- In some states, the owner can transfer personal assets into a trust where they are immune from creditors.
- The owners can arrange their assets in a way that minimizes the possibility of losing them in case of future liability problems.
If you need help in protecting your assets from liability arising from an 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.