As the name indicates, one of the key advantages of an LLC, a Limited Liability Company, is its liability protection. That places it ahead of the sole proprietorship, which offers no such protection, and corporations, which do offer some kind of liability protection. However, LLCs offer a more effective way to protect the LLC owner’s assets with fewer bureaucratic challenges.
An LLC is quite flexible and can be fairly informal. It can be formed by just one person, or it could have multiple members, as in a partnership. Of course, it has to be set up correctly as well, as you can see in the example of forming an LLC in Illinois.
However, the reason it’s so popular as a business entity is that it provides such strong protection of the business owner’s personal assets, whether there is just one owner or whether there are many members.
This means that if your LLC should get sued or it has debts, your personal property, such as your home, your car, your investments, your bank account, or your other personal assets, cannot be touched by liens or by your creditors, at least not usually. Your creditors can only get at the assets of your LLC. This also applies if your business should fail. Your losses will be limited to the assets you hold in your LLC. As a result, your business may be gone, but you will still have your personal assets, and you can start a new business as well.
There Are Important Exceptions
You should know, however, that the protection you are provided by your LLC is not ironclad. There are certain situations that you can find yourself in or mistakes that can be made that can make you vulnerable to losing that protection. It’s very important that you are aware of all the potential exceptions and pitfalls so you won’t lose your protection. Fortunately, there are a few things you can do to protect yourself.
Since you may be liable for potential mistakes that may occur, be sure to get plenty of liability insurance. Talk to your insurance agent and your business law attorney for recommendations. The specifics of risks and potential losses will also depend on the nature of your business, and they will be able to advise you.
Then, if anything should go wrong and you are found liable, your insurance will pay for the losses instead of your company or your personal bank account.
Separation of Personal And Business Assets
In order to benefit from the asset protection your LLC provides, it is essential that you keep your personal assets and your LLC’s assets strictly separate. This means, for example, that you should never pay business bills with your personal credit card. At the same time, you should never use your business credit card to make your mortgage payment.
The LLC’s protection is based on the fact that your business finances and your personal finances are completely separate, and you don’t want there to be any confusion because of any kind of comingling. If there is, the corporate veil will be breached, your protection is void, and your creditors or the other side’s lawyers can go after your personal assets.
The separation of personal money and LLC money is also crucial when you sign contracts, be it for loans, equipment rentals, leases, or anything else having to do with your business. Always use your LLC’s name on any relevant documents, not your personal name.
What’s more, you should also carefully check any of these contracts, and especially any paperwork involving loans, to make sure they don’t include any reference to anything that could make you personally liable.
Lending specialists are very skilled at including phrases in the small print of contracts that make your personal assets the backup source of payment if your LLC cannot make the necessary payments. The lender may also ask you directly to guarantee a loan personally. Try to avoid doing this whenever possible.
As you can see, things can get tricky if you want to make sure you are really protected. So make sure you have an experienced business startup lawyer to consult with, someone who will check all your important documents and make sure there are no mistakes.
You should know that some of the details can vary from state to state, so be sure to keep your attorney in the loop.
What Exactly Does And Doesn’t Your LLC’s Protection Cover?
First of all, your LLC’s protection covers any personal liability for your business debts. If your LLC has more debts than it can pay, you are not responsible for paying them from your own personal funds. That’s why it is so important to keep your personal finances separate from your business finances. You need to make sure that the corporate veil stays intact, or else you WILL be held responsible.
Next, your LLC’s protection also covers any personal liability for your own actions you take within your business unless you commit fraud or other wrongdoings or you injure someone. In that case, you are going to be liable for the action.
It also covers any liability resulting from the activities of your fellow LLC members, if there are any. However, if a member was involved in an illegal or negligent activity that caused significant damage by, for example, causing an accident, they, too, will be held personally responsible.
Moreover, if other members of your LLC have personal debts and financial obligations they have trouble keeping up with, that is their own business, and your LLC will not be responsible for these debts, at least in most states. However, the creditors can also go to court to get a charging order to recoup the outstanding debt. While the LLC protects its owners against charging orders to a certain extent, the details can vary from one state to another.
As you can see, there are a number of potential challenges you can face when running an LLC. To stay on the safe side, you should definitely consult with an experienced business attorney and let them guide you to success. Just call or email us for a free case evaluation for business law, and we will be happy to help you.