Asset protection is a legal strategy that protects your assets against unforeseen circumstances, including bankruptcy, divorce, taxation, court judgments, and claims by other people and companies. Therefore, it’s an essential legal structure you can implement to mitigate your risk.
Georgia LLC asset protection lets you protect your assets in the state and further afield. Therefore, it’s an essential tool to carry with you on your entrepreneurial journey for peace of mind.
This post explains what an LLC is, how you can use one to protect your assets, and how easy it is to form one with the correct legal assistance. It’s way more affordable than you think!
What is an LLC?
LLC stands for 'limited liability company'. It is a business structure in the U.S. whereby owners are not personally liable for company debts or liabilities.
LLCs occupy the middle ground between a corporation and a sole proprietorship. Owners retain control of the business but don’t take on the same level of personal financial risk.
For example, suppose your LLC company cannot pay its debts. In this case, creditors cannot pursue you for personal liability by seizing your property or private assets. Instead, they receive a charging order, entitling them to LLC distributions. They must take the loss if they cannot retrieve all the money the company owes them.
How an LLC protects your assets
Establishing an LLC creates a new business entity legally separate from your personal finances. That’s where the term 'limited liability' arises. Entrepreneurs and owners are only liable as far as the boundaries of the business. They do not need to sell their house, car, or stock portfolio to repay creditors.
In practice, this legal structure limits the actions creditors can take. Generally, they can only seek funds from your LLC’s bank account and other assets (such as buildings included on your company’s balance sheet). They cannot garnish wages from your private bank account or those of other family members.
Given this legal structure, you should separate your personal and business assets. Do not list your residence as a place of work, and do not use credit cards for company expenses. When you take money out or pay yourself dividends, ensure your accountant clearly defines these transactions.
When doesn’t an LLC protect your assets?
Of course, LLCs don’t protect your personal assets in all circumstances. Sometimes, you will face liabilities.
For instance, you will be liable for paying debts you personally guarantee, even if you are a member of an LLC. Typically, these situations occur if the opposing party insists you sign clauses in financing agreements wavering your legal protection.
Courts may also decide not to uphold LLC protection if your business fails to conduct proper functions. For example, judges may hold you personally liable if you fail to observe corporate formalities, such as keeping board minutes and holding regular board meetings.
You can also lose your right to protection against creditors if you engage in fraud or reckless conduct. Courts may conclude your LLC is a sham and demand you repay creditors what you owe from your personal finances.
Lastly, negligence or wrongful acts invalidate your LLC protection in some circumstances. Failing to adequately capitalize your business, committing crimes, or leaving your employees unsupervised may negate Georgia Limited Liability Company asset protection.
Courts sometimes hold LLC members responsible for the actions of their agents and employees in their care. Therefore, crimes committed by these individuals could result in personal liability via 'vicarious responsibility' laws. As the senior team member, judges could find you guilty of failing to properly monitor or supervise individuals operating in your organization’s name, particularly if they injure a victim.
Improving LLC asset protection in Georgia
A proper asset protection strategy helps you protect your assets if creditors decide to pursue your business for debts. Here’s what you should do:
Buying insurance provides additional protection beyond what you get when you form a Georgia LLC. Having the right cover prevents prosecutors from accessing your personal assets directly. Insurers pay any money you owe, provided you abide by their terms and conditions.
Entrepreneurs and business leaders need to choose the right cover. Therefore, assess your business situation and seek out the proper level of liability protection. Work with an industry professional who understands the risks you face in your line of business and then purchase premiums covering the most likely eventualities. Ensure your policy protects you if you are negligent or make a mistake on the job. Carrying the minimum insurance for your business puts your personal assets at a significantly higher risk.
Elect Corporate Status
The IRS taxes LLCs as either sole proprietorships or corporations. Changing your status to the latter can provide superior protection against unpaid payroll and tax liabilities.
To change your status, you must complete Form 8832 and elect either a C-corporation or an S-corporation. Which you choose depends on your business structure and industry, so always consult with professionals.
During this process, ensure you maintain your Georgia LLC status. You must operate an LLC to benefit from liability protections.
Become an independent entity
Also, ensure you run your LLC as an independent entity. Recent case law precedent challenges LLC status by contending owners are not operating bonafide businesses.
Do not mix personal and business duties to meet independent entity criteria. Always keep your accounts separate and maintain independent financial records for your limited liability company.
Courts may interpret failing to adequately capitalize your business as a sham, causing you to lose your protections. Therefore, always ensure you gather sufficient funding at the outset to avoid this accusation in the future.
Use a trust
Some entrepreneurs use trusts to protect their personal assets. These place homes, cars, cash, stocks, and bonds into a legal structure, protecting them from LLC liabilities.
Unfortunately, Georgia does not recognize domestic asset protection trusts. Therefore, you will need to consult with experienced lawyers on state policies.
Put your income into protected assets
Allocating more of your business income towards protected assets is another powerful strategy for protecting your funds during a claim. Roth IRAs, regular IRAs, e529 college savings plans, and cash-value life insurance policies can all protect you against LLC debts if creditors come knocking. The government and courts consider these assets as separate, meaning you can retain them even if you go bankrupt.
Minimize vulnerable capital your business holds
Another strategy is to minimize the quantity of valuable capital creditors could extract from your enterprise. Running a capital-lite operation reduces the size of your assets, making it harder for liquidators to get money from your firm.
The following are some popular strategies you can try:
- Regularly withdrawing funds from your business and keeping them somewhere safe (such as in a protected account)
- Leasing or renting equipment instead of owning it outright
- Renting your premises or office space
- Using equity to fund new debt
- Tying up your organization’s assets with the holding entity using liens
Keep assets under a different name
Lastly, you might want to keep assets under a different name, such as your spouse or children. This way, your name will not show up when creditors perform credit checks. Always consult with a lawyer if you are considering this strategy.
Form an LLC
Forming an LLC in Georgia requires you to take the following steps:
- Decide on a name for your entity. You must use LLC abbreviations, such as L.L.C. or L.C, in your name. No other company should already be using your name.
- Choose a registered agent in Georgia. A registered agent is someone who accepts official mail on your behalf. Usually, founders and entrepreneurs choose a business attorney.
- Get Georgia business permits. State laws require companies to obtain permission before they can commence operations. You will also need to apply for a state taxpayer identification number and purchase workers' compensation insurance if you have employees.
- File your organization’s articles and transmittal form. You’ll need Form CD 030 for your business’s articles and a transmittal form that contains additional information about your firm, such as your address and registered agent information.
- Draft your LLC operating agreement. This document sets out the rights and responsibilities of each founding member.
- Comply with state requirements. You’ll need to pay taxes depending on your tax status in Georgia. LLCs taxed as corporations will need to pay taxes annually.
- File registration report. In Georgia, businesses must file a registration statement annually with the secretary of state.
- Meet federal obligations. Lastly, businesses formed in Georgia must comply with federal obligations. Federal taxes are different from those at the state level. Therefore, you’ll also need to consider Medicare and Social Security expenses if you hire employees.
- Forming an LLC in Georgia is a long process. However, when you schedule attorney time, it can be a breeze. Our team can guide you through every step of the process.
Form an LLC now with us and see how simple it can be. We offer a 24-hour filing guarantee.