LLC asset protection is a tool that entrepreneurs and owners use to protect their personal wealth, even if their company loses money. It’s a time-honored system going back more than a century to encourage enterprise and prevent you from having to give up your assets if your business goes under.
This article shows you how LLCs protect your assets and what you can do to improve your asset protection strategy. After reading it, you should better understand how to secure your home, retirement funds, car, and stock portfolio, even if you go out of business.
What is an LLC?
An LLC (or 'limited liability company') is an entity that limits how much debt courts and creditors can force you to pay back if you go out of business. It is an independent person in the eyes of the law, meaning creditors can only extract assets on the balance sheet. They can’t come after your personal finances or force you to sell a residential address to cover debts (with some minor exceptions, which we will cover later).
The same liability limits work in reverse, meaning LLCs protect you from liability resulting from your personal life. For example, a person you injure in a car accident can’t force you to sell LLC business assets to cover a lawsuit against you. North Carolina law forbids it. They can only pursue personal assets or distributions you receive from your LLC.
Of course, to qualify for LLC asset protection, you must operate a legitimate business. It cannot be a sham.
You must also systematically separate your personal property for North Carolina limited liability company asset protection. Failing to do so could lead to legal complications in the event of claims against you.
How an LLC Protects Your Assets
LLCs protect your assets by changing your legal relationship with your firm. Sole proprietors and partnerships blend their personal and business assets. Therefore, they don’t benefit from liability limits. (Their protection comes from various insurance policies and business models limiting debt exposure).
By contrast, LLC asset protection creates a separate legal entity responsible for its own finances, independent of yours. This legal separation applies even if you are the sole member or owner. Courts and creditors can only pursue the company for its debts, not you.
To many entrepreneurs, a setup like this sounds counterintuitive. Operationally, the difference between a North Carolina LLC and a partnership seems minimal. However, legally there are vast differences, allowing you to take business risks without putting everything you’ve worked for at risk.
LLCs protect the assets of all members (the individuals who found the company). Hence, it is an excellent structure to convince others to go into business with you. Colleagues may be more willing to take risks if they aren’t putting their homes, cars, and stock portfolios on the line.
Unfortunately, LLCs do not protect your personal assets in all circumstances. Members involved in negligent behavior, wrongful acts, fraud, assault, or other instances that cause injury to third parties remain personally liable under North Carolina asset protection law.
How to improve LLC Asset Protection in North Carolina
North Carolina LLC asset protection is not perfect. But fortunately, there are plenty of ways to improve it.
All businesses should buy insurance regardless of their structure because it is a legal requirement. However, purchasing the right insurance can improve your level of protection significantly.
As an entrepreneur, you should look at your business situation individually and ask what level of cover you need. Consult with brokers about the risk types you face in your industry and the specific protection you require. Avoid purchasing generic and specific insurance because you may wind up with duplicate coverage. Go to insurers who understand your industry and can price your risks accurately.
Choose corporate status
Electing corporate tax status with the IRS is another powerful way to protect your assets. Here’s how it works.
When you set up an LLC, you can choose whether to file as a sole proprietor (maintain your existing tax arrangements) or a corporation. Choosing the latter can protect your personal assets if you cannot pay taxes or payroll expenses because you go out of business.
For example, suppose you have a profitable 2021 but cannot pay wages and taxes in 2022, despite running a surplus for part of the year. Under IRS corporate rules, your LLC is liable for the debts owed, not you. Therefore, you can dissolve your firm without selling assets to meet your company’s liabilities, even if you are the sole owner.
Establish your LLC as an independent entity
Another strategy to improve your asset protection level is establishing your LLC as an independent entity. Make sure it is a bonafide business selling genuine goods and services to consumers.
Courts sometimes find owners liable even if they have LLC status if they discover the firm does not operate like a conventional business. For example, your assets may be at risk if you mix your personal and business finances. They may also find you liable if you deliberately undercapitalized your firm or fail to maintain separate financial records.
Therefore, ensure your firm is not a sham. Do real business. If you cannot, dissolve it immediately.
Keep wealth in trusts
You can also protect your wealth by keeping it in various trusts. Putting stocks, bonds, homes, and other assets into irrevocable legal structures prevents creditors from accessing your money, even if you fall foul of LLC rules. That’s because the government defines these as separate assets.
Only certain types of assets qualify. These include:
- Pension funds
- College or education funds earmarked for your children
- Homestead exemptions (up to $35,000 in North Carolina for a single individual or $70,000 for a couple)
Keeping wealth in trusts is significantly more important if you own a home worth over $1 million, vacation or rental properties, or are a high-earning professional. You also need to be careful if you own another business with a high value. Creditors may see the benefit in spending significant legal expenses pursuing these assets.
Don’t mix LLC and personal accounts
Never mix your LLC and personal accounts. Courts may take the view that your personal assets are, in fact, part of your business.
For instance, don’t list your home as your official business premises (even if you work from home). Also, ensure you do not list your private vehicle on your company accounts. If in doubt, work with a qualified accountant experienced in such matters.
Keep adequate records and perform generic business functions
Under North Carolina law, creditors can pursue your personal assets if your business fails to carry out basic functions or keep adequate records. Therefore ensure that you:
- Maintain all the proper records and business documents required by law
- Make regular distributions to LLC members
- Engage in regular business formalities, such as annual board meetings and keeping business minutes
- Maintain the business as a single, non-fragmented entity
Set up another LLC
You shouldn’t hide your assets from the courts. However, you can set up another LLC to provide your assets with further protection. You may also be able to contribute to these anonymously.
Own assets in another name
Lastly, you could consider putting assets in another name, such as that of your spouse or relative unconnected to the business. When creditors perform asset searches, they will look for those you own in your name, not others.
Form an LLC
You need to go through several steps to form a North Carolina LLC.
Choose a name. The name of your LLC should be different from any other firm operating in North Carolina or the U.S. It must also include a variation of 'LLC' (such as l.l.c or limited liability co.). You cannot use obscenities. You mustn’t use certain words, such as 'bank', unless you are setting up a bank.
Designate your registered agent. Your registered agent is a person who will act in a legal capacity on behalf of your firm and forward documents to the owner. The agent can be you (if you are the company founder), or you can hire a professional.
File North Carolina LLC forms. You’ll need to submit Form L-01 or articles of organization. NC also requires you to file a Certificate of Authority Form L-09.
Filing to form an LLC can be a complex process if you’ve never done it before. And officials may reject your application.
However, when you schedule attorney time with us, you can avoid these issues. Our team ensures your application is perfect before you submit it, eliminating delays and disappointment.