When an entrepreneur plans to create a new business, one decision normally made immediately is how to register the resultant company. Many of these owners wish to operate their businesses with the freedom sole proprietorship offers but are concerned with what can happen to their personal assets if these ventures crash and burn. The option that most of them will turn to is forming limited liability companies (LLCs) for the personal asset protection they offer.
What is Limited Liability?
When you form an LLC, you create a brand-new legal entity that is entirely separate from you and other shareholders (whoever they are). Accordingly, each member receives ‘limited liability’. This protection means that if the company ends up failing, faces lawsuits or files for bankruptcy, the members’ personal assets are protected from seizure as a tool to fulfill the business’s debts. In essence, only the entity itself is responsible for paying those debts down, not you personally.
Personal assets normally include personal bank accounts, residences, and many other kinds of goods; all of them typically protected by LLCs. However, LLC assets cannot be used to satisfy a member’s personal debts. That being said, the only significant loss an LLC owner or shareholder will probably face in light of the entity’s bankruptcy is their capital contribution to it. There are some caveats though to know; for example, similar to other incorporation entities, an LLC proprietor could face personal liability lawsuits if he or she has personally guaranteed a particular company debt.
How Creditors Try to Attack LLCs
One method creditors can use to break through the barriers between your entity and your personal assets is known as “piercing the corporate veil.” This situation happens when an LLC shareholder has committed fraud, co-mingled their personal and company assets together, or failed to commit adequate assets to the venture in the first place. If you also transfer personal property to an LLC for the sole purpose of evading creditors, then your personal asset protection can be rendered void if caught by the authorities.
Despite these instances, LLCs still offer a thorough degree of personal asset protection, even if the company itself becomes burdened with debt. The main takeaway to remember though is to be careful and keep your personal finances separate from those of the company itself. If that happens, then the LLC should keep you reasonably safe. If you have any questions about how to setup an LLC effectively or if one is appropriate for you or not, the staff at Anderson is knowledgeable in these matters.