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Does an LLC Protect Your Personal Assets?

By Jeannine Mancini

Published on 6 Apr 2023 8 min read

If a business is set up as a Limited Liability Company (LLC), it can safeguard the personal assets of the business owner from being seized by business creditors. An LLC establishes a barrier between the liabilities of the business and the owner’s personal assets. Consequently, in most scenarios, a lender cannot compel the owner to reimburse a loan acquired by the business, nor can someone who wins damages in a lawsuit against the business force the owner to compensate for it. Nonetheless, the protection offered is not absolute, and business owners may wish to adopt additional measures to safeguard their personal assets from business liabilities.

What Is the Purpose of an LLC?

An LLC is an effective way for entrepreneurs and business owners to seek legal protection from their personal assets. By establishing a business as an LLC, the owners can ensure that they will not be held personally responsible for any debts or liabilities incurred by the company. While the LLC may be liable for its own losses, creditors cannot go after the owners’ bank accounts or other personal property to satisfy those debts. 

In addition to providing limited liability protection to its members, an LLC also offers flexibility in terms of taxation. Unlike a traditional corporation, an LLC is not subject to double taxation. Instead, profits and losses pass through directly to its members and get taxed as part of their individual tax returns. This helps make things simpler and more efficient at tax time. 

Another advantage of forming an LLC is that it provides members with additional credibility when dealing with customers and vendors. An established LLC will often have more credibility than a sole proprietorship because it demonstrates stability, experience, and success – factors that are important when customers are deciding who gets the contract. 

Cases When an LLC Can Not Protect Your Assets

While LLCs provide significant asset protection benefits, there are a few situations where they may not be able to shield the owner’s personal assets completely. For example:

Mixing Business and Personal

Mixing business and personal finances can create a liability that would put your personal assets at risk. Sometimes this happens when a business owner takes out loans using their own name rather than the company’s name. For example, if you take out a loan in your own name to purchase equipment for the company, then that loan is tied to you personally and it puts your home or other assets at risk should you default on it. 

As a rule of thumb, you should always have a separate bank account for business assets and personal assets. Never comingle funds. 

Signing Personal Guarantees and Contracts

Another way in which you could be held liable is by signing a personal guarantee or contract that was negotiated on behalf of the LLC. In this situation, signing with your name as opposed to signing with the name of the company means that you are personally responsible for any losses incurred through fulfilling said contract or guarantee. This means that even though you may have legitimate protection under the LLC structure if you sign something personally then you could still be held accountable for any legal issues that arise related to your signature. 

Piercing the Corporate Veil

The concept of piercing the corporate veil is another situation in which an LLC alone can’t protect your assets as much as you may have hoped. This occurs when courts see fit to disregard limited liability and hold shareholders personally responsible for losses or damages caused by their company’s activities due to factors such as negligence or fraud. If a court decides to pierce the corporate veil, then owners will no longer enjoy full protection from liabilities and other claims against their business entity. 

Doing Illegal Practices

Doing illegal practices or activities within an LLC is yet another way in which individuals can find themselves vulnerable to further liabilities and risk non-protection from a limited liability structure alone. If a company uses deceptive and unfair practices such as false advertising or misleading contracts, it can bring about legal action against both the company itself and its members simply because of its unlawful actions – something an LLC cannot shield them from ultimately. 

Causing Injury to Someone Due to a Service Your Business Provides

If the service provided by your business is found to be the direct cause of injury or any other damage to someone, then an LLC will not protect you from having to pay. Even though the liability may fall on the company instead of you personally, you may find yourself facing severe financial troubles if the court orders you to pay compensation for the damages suffered by that person or parties involved. 

To prevent this from happening and staying within legal boundaries, make sure that all services offered by your business comply with current laws and regulations in addition to industry standards. You should also have appropriate contracts and waivers in place so all parties know what they can expect when using your services.  

Paying for Environmental Clean-Up

If authorities determine that your company has caused environmental damage, such as water or air pollution, then you may still be required to pay for its restoration even if you own a limited liability company. To avoid this kind of situation altogether, your business must follow all applicable environmental laws and regulations while conducting its activities. Otherwise, any damages caused may be attributed directly back to you as the owner and manager of the company. 

Minimizing Risk

Minimizing risk associated with owning an LLC can be done with certain measures taken by ownership such as diligently following corporate formalities like documentation requirements and respecting each member’s roles within the organization’s structure.

How to Make Your Personal Assets More Protected

There are some strategies you can use to further enhance the asset protection benefits of having an LLC.

Get LLC Insurance

Getting LLC insurance can be a great way to make sure that your personal assets are protected. An LLC insurance policy is designed to cover liabilities that arise due to legal omissions, errors, or negligence of the company’s owners, officers, or employees. For example, if somebody were to sue your business as a result of something you did or failed to do while running it, an LLC insurance policy could cover damages and legal costs arising from such lawsuits.

Keep Your LLC as an Independent Entity

Keeping your LLC as an independent entity is another important step in protecting your personal assets. This means that the business finances should be kept separate from those of the individual members and all contracts should be signed in the name of the LLC rather than any one individual owner. Doing this creates a distinct barrier between your personal life and business life and ensures that creditors can’t come after your personal assets in case of a lawsuit. 

Have an Operating Agreement in Place

Having an operating agreement in place is also crucial for protecting individual members’ interests within an LLC. It outlines how decisions will be made within the company, what rights each member has, how profits will be divided among members, and how disputes will be handled. This agreement can help protect all members involved by making sure everyone understands their respective roles going forward. 

Establish LLC Credit

Establishing LLC credit is also important for protecting yourself as an LLC owner since it ensures that you’re able to get loans for things like property purchases without putting your own credit at risk. To establish this credit, you’ll need to set up a separate line of credit with banks or other financial institutions specifically for the LLC business. Once established, this line of credit can help you obtain loans more easily by showing lenders that you have enough capital to pay them back on time.

Maintain Enough Money in the LLC’s Accounts

Maintaining enough money in the LLC’s accounts to cover any potential liabilities is one of the most important steps. If a court were to rule against the LLC, having enough funds available within the company would ensure that creditors are not able to reach any of your personal assets. For example, if you own a small business and expect $100,000 in potential liabilities, it’s recommended that you keep at least this amount available in your company’s accounts so that creditors can’t touch any of your personal property. 

Use Separate Banks for Business and Personal

Along with maintaining adequate funds, using separate banks for both business and personal finances can increase asset protection. Using two different banks ensures that all transactions are kept separate from each other and also helps prevent cross-contamination of funds between business and personal accounts. 

If you have both a business and a personal account, use two different banks for each: one bank for business transactions, and another for personal transactions. This will help ensure maximum asset protection since the assets held in each bank are completely independent of one another. 

Search for Strategies to Protect Assets from Personal Creditors

Another way to protect assets when forming an LLC is by researching strategies to protect them from creditors who may come after them personally. Creditors may not be able to come after assets held within an LLC. However, they may still seize other items owned outside of the company such as retirement or investment accounts. Knowing what strategies exist so these assets can remain protected under an LLC is key to ensuring total asset protection. For example, establishing additional entities such as trusts can further shield your assets from creditor claims; these entities can provide additional layers of insulation keeping those investments safe from seizure even if they are owned outside of the LLC itself. 

Consider Forming a Trust

Finally, you should consider establishing a trust as part of your asset protection strategy when forming an LLC. A trust is a legal entity created specifically to hold a title on behalf of owners who wish to keep their financial interests separate from their identities. This provides yet another layer of protection beyond just having an LLC alone. For example, if you own real estate through an LLC but want further protection from creditors then transferring ownership into a trust could give you added assurance knowing that even if creditors wanted access to your real estate holdings they would be blocked due to ownership held by the trust instead of yourself personally or through an LLC owned by you directly.

Maximizing Your Asset Protection With doola

Setting up an LLC is an effective way to protect your personal assets from business liabilities. However, it’s important to note that there are situations where an LLC may not offer full protection. By following best practices like maintaining adequate funds in the LLC’s accounts, using separate banks for business and personal finances, and exploring additional asset protection strategies like trusts, you can further bolster the protections an LLC provides.

Keeping accurate and up-to-date bookkeeping records is crucial in maintaining the separation between personal and business finances, and doola can help you with this task. They’ll ensure that your LLC’s finances are properly tracked and managed, freeing up your time and energy to focus on growing your business.

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