Limited Liability Companies (LLCs) are known for many things – one of the biggest being personal liability protection. Viewed as a hybrid between a corporation and a partnership, an LLC has the flexibility to fit almost any type of business.
Before forming an LLC, there are certain things to consider. For instance, how does an LLC protect your assets? And what can you do to further protect your personal assets from a business lawsuit?
These are important questions that all business owners should be asking because simply forming an LLC may not always protect your personal assets. It takes careful structure, proper documents, and accurate operation to provide the protection you desire.
How an LLC Protects Your Assets
Once you decide to form an LLC, you establish a new business entity. This means the business is separate from the owner(s) and limited liability applied.
For instance, if the business is sued or files bankruptcy, only the business assets and bank accounts are up for grabs to creditors. The owner(s) personal assets, such as investments, home, and even other businesses, cannot be considered for repayment.
An LLC also protects owners from personal liability for actions of employees and co-owners. While the employee or co-owner may be personally liable for any wrongdoing or negligence, other owners will not.
This leads into the main exception that exists in all states when it comes to the protection of an LLC. If you commit wrongdoing, directly injure someone, fail to pay taxes, or not treat the LLC as a separate business entity, then you will be held personally liable. If you and your LLC are liable, then both business assets and your personal assets can be taken by creditors.
When forming an LLC, it’s vital to plan ahead and protect your personal assets from the very beginning. If you are currently in the middle of a lawsuit, an LLC status will not protect you.
Improving LLC Asset Protection
To help lessen the risk of personal liability, there are a few strategies you can add to improve LLC asset protection.
Purchase Insurance – There are various types of business insurance available, and it’s advised to choose a plan that best fits your situation. While premiums can be high, having no insurance – or not the proper coverage- could kill a business.
Elect Corporate status – From the very beginning, LLCs have the option to be taxed as either a sole proprietorship or corporation. If you meet the qualifications for a corporation, your personal assets are better protected from LLC liabilities.
Independent Entity – If owners do not treat the LLC as a separate entity, they can be found liable for debts. The only way to avoid this is to ensure you run your LLC as an independent entity. You do this by maintaining separate financial records for the LLC and properly capitalizing your LLC. Never mix your personal assets with business assets.
Use Trusts – Placing your personal assets, such as stocks, vehicles, and home into an irrevocable trust also helps protect those assets from LLC liabilities. State requirements and laws vary greatly when it comes to trusts, so it’s best to work with an experienced professional.
Use Another Name – Everything your personal name is attached to will become visible to creditors if your LLC is sued. There are many ways for you to put assets in another name – such as a holding company – so that those assets are protected from public records.
Form an LLC
The steps to forming an LLC will vary by state. However, there are a few general steps you will need to take to ensure you’re protected from liabilities.
Select Your State – Business owners typically form an LLC in the state in which they live, and the business operates.
Choose a Business Name – Your LLC must be given a unique name from other businesses within the selected state.
Assign a Registered Agent – A registered agent for your LLC is designated to accept all legal notices and documents on the business’s behalf.
File the Articles of Organization – The Articles of Organization is the document that officially registered your LLC with the state.
Create an Operating Agreement – An Operating Agreement is the legal document that outlines the details of your business.
Submit Application - After ensuring you have all documentation properly filled out, filed, and approved, you can submit your application by mail or online.
Although these steps sound simple, there are often tedious details that need to be addressed. That’s why it’s best to work with a business lawyer to ensure proper creation and filing of all LLC documents.
One of the main reasons business owners form an LLC is to ensure they are not personally liable for the companies’ debts or liabilities. This can only take effect if the LLC is properly formed with the correct documentation and operated accurately.