If you own or are a part-owner of an LLC, you should consider implementing one or more LLC asset protection strategies.
Forming a Limited Liability Company (LLC) allows you to separate the business from the owner or owners of the LLC. The separation provides an LLC owner with limited liability protection. If an LLC cannot pay off its business debts, creditors try to go after the bank account and other assets held by the LLC. The only financial risk to each owner of an LLC is the amount of money an owner puts into the LLC.
Manage an LLC as an Independent Business
They say you should never mix business with pleasure, and the same principle applies to an LLC when it comes to mixing business and personal assets. If a court discovers that you do not run your LLC as a separate business entity from your personal finances, the court might declare your personal assets fair game for liquidation to meet debt obligations. Running your LLC as an authentic independent business should protect your personal assets from legal scrutiny.
Purchase the Right Amount of Insurance
Just because your LLC enjoys limited liability protection does not mean you can cut cost corners by forgoing insurance. Every LLC benefits from purchasing the appropriate amount of insurance to protect both business and personal assets. An attorney who helps owners form and run an LLC can advise you on the type and amount of insurance you should purchase for your business. An industry or a professional association can also help you buy the right amount of insurance coverage for your LLC.
Designate Your LLC as a Corporation
When you form an LLC, the law allows you to organize the business as a partnership, corporation, or sole proprietorship. The IRS does not recognize an LLC as a federally taxed business structure. Selecting to operate as an S Corporation or a C Corporation helps protect your personal assets from the debt accumulated by your LLC, as well as any business liabilities such as unpaid business income and payroll taxes. Make sure to operates your LLC as a business entity that is independent of your personal transactions.
Obtain Credit for Your LLC
One of the most common reasons why LLC owners become legally liable for the financial commitments made by the company is making personal guarantees. If you sign a loan or lease, and then agree to make payments if the LLC cannot, then you can expect to be on the financial hook for the LLC’s financial issues. A lender might ask you to put up your home or another type of high-value asset to consummate a business deal.
Don’t do it! Establish credit for your LLC and use it to protect your personal assets.
Pull Money You Do Not Need Out of the LLC
If a creditor sues your LLC, the business assets, not your personal assets, are eligible for liquidation. To minimize the financial vulnerability of your LLC, pull out as much money as you can and pay the extra cash to each of the owners. However, you need to do this before you receive notice of a lawsuit filed against your LLC. Otherwise, the judicial system might declare the transfer of money out of your LLC as fraudulent. Never pull money out of your business that the business needs to remain viable. It is a fine line to walk, but you have to leave enough money in the business to take care of all financial obligations.
Learning which of the LLC asset protection strategies works best for you depends on the unique financial status of your business. Before you implement one or more of the strategies, meet with a business attorney like Cloud Peak Law Group to help you understand the laws that govern LLC asset protection.