Five Critical Steps to Protect Assets with an LLC
How to protect personal assets through an LLC:
1. Form an LLC
Forming an LLC to protect personal assets must be done in advance, not after a lawsuit has been filed. When an LLC Is formed, it establishes a new business entity that’s legally separate from its owners. This separation provides what is called limited liability protection. As a general rule, if the LLC can’t pay its debts, the LLC’s creditors can go after the LLC’s bank account and other assets, but the owners’ personal assets such as cars, homes and bank accounts are safe. An LLC owner only risks the amount of money he or she has invested in the business.
However, there are exceptions. For example, LLC Owners are still liable for debts that they have personally guaranteed. Owners may be liable for unpaid payroll taxes. Further, Owners may be liable if they are sued for their own wrongdoing.
2. Obtain LLC Insurance
It is important to have a good liability insurance policy that will cover both the Owner personally and the business if the business gets sued. A business insurance policy has the role of keeping the LLC itself from having to pay for its own misdeeds.
For Example: If someone files a lawsuit accusing the Owner of wrongdoing—whether it’s negligently maintaining the business’s building, wrecking the company van or defrauding a customer—the LLC will not protect the Owner from personal liability. And the judgment in a personal injury lawsuit can be financially devastating.
3. Maintain the LLC as an Independent Entity
When Owners mix personal assets with corporate assets the Owner can sometimes be held personally liable to the LLC.
To avoid any chance of liability, it is important to keep LLC records and finances completely separate from the Owners’ personal finances. The LLC should have its own bank account and credit cards. Contracts, invoices, purchase orders and other important documents should always have the LLC name on them and should be signed on behalf of the LLC. That way, everyone the Owner does business with will know that they are dealing with an independent entity and not the Owner personally.
4. Establish LLC Credit
Personal guarantees are a major reason why small business owners become liable for LLC obligations. If an Owner personally guarantees a lease or a loan, the Owner is agreeing to make payments if the LLC cannot. If the LLC defaults on the obligation, the creditor may go after the Owner’s personal assets to satisfy any debts.
It is not uncommon for new business owners to personally guarantee large transactions. But Owners may be able to avoid some guarantees in the future by establishing credit in the LLC’s name, paying bills on time, and showing a track record of revenue and profit.
5. Keep enough money in the LLC
If the LLC is sued, the money that is in the LLC can be used to satisfy a creditor, but personal assets typically cannot. To limit vulnerability, it makes sense to keep as little money as possible in the LLC and pay the rest to the Owners.
Be aware that there are a couple of important limitations on this, however. If LLC already owes a creditor and transfers money out of the LLC, the transaction may be regarded as a fraudulent transfer. And if the Owner does not keep enough money in the LLC to meet its expenses, a court may hold the Owner personally liable for undercapitalizing the business in an effort to defraud business creditors.
As noted, personal assets can still be at risk for LLC obligations if an Owner is sued for personal wrongdoing or as a result of a personal guarantee. Asset protection LLC strategies such as keeping business and personal finances separate and maintaining proper insurance can help keep personal assets safe from business creditors. Although there’s no such thing as 100 percent protection, advance planning can help reduce risk.
States realize that if entrepreneurs were forced to put their livelihoods at stake every time they started a new venture, significantly fewer businesses would be started. Therefore, certain entity types are afforded limited liability, which protect the owners and managers of the business from being held personally responsible for the debts, obligations, and misdeeds of the business.
Out of all the entities, LLCs offer the most comprehensive form of this protection. Schedule your free, personalized consultation to learn more about how an LLC protects you and your business.
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