A Limited Liability Corporation, or LLC, can be utilized for any size firm, from sole proprietorships to multi-ownerships. In addition, LLCs are the most popular legal entity utilized for ownership of rental and commercial property. It can assist as a safeguard for your personal assets, but there are a few extra measures you should take to optimize your personal security.
The formation of a Limited Liability Corporation is a critical first step in safeguarding your personal assets from being used to pay business creditors. However, the liability protection afforded by an LLC is not total. To provide yourself the most security possible, you should devise an LLC asset protection strategy.
Understanding an LLC’s Limited Liability Protection
When you create an LLC, you create a new company entity that is legally distinct from its owners. This separation offers what is known as limited liability protection.
In principle, if the LLC is unable to pay its debts, the creditors of the LLC can seize the LLC's bank account and other assets. Assets of the owners, such as automobiles, houses, and bank accounts, remain secure. An LLC owner is solely at risk for the money he or she has put in the firm.
However, there are exceptions, and owners are still accountable for debts that they have personally secured. They may be held accountable for underpaid payroll taxes. In addition, if they are sued for their own conduct, they are responsible including any consequences that may arise. Despite these restrictions, liability protection is an important characteristic of LLCs and plays a vital role in your asset protection plans. Here are some pointers to help you make the most of it.
Obtain LLC Insurance
If you are sued for misconduct, whether it is carelessly maintaining your facility, destroying the business vehicle, or deceiving a customer, your LLC will not insulate you from personal culpability. A personal injury lawsuit's verdict might be financially ruinous. As a result, it is critical to have a solid liability insurance coverage that covers both you and your business if you are sued.
Maintain your LLC as an Independent Entity
In corporate law, stockholders who combine personal and corporate assets may be held personally responsible as the corporation's "alter ego." There are hints that courts may extend this type of responsibility to LLC owners as well. Keeping LLC records and funds totally separate from the owners' personal finances is crucial to eliminate any possibility of alter ego liability. The LLC should have its own bank account as well as its own credit cards. Contracts, invoices, purchase orders, and other key papers should always have the LLC's name and be signed on its behalf. These distinctions will make it easier for third parties to understand that they are dealing with independent entities rather than you personally.
Establish LLC Credit
Personal guarantees are a significant reason why small business owners are held accountable for corporate commitments. If you personally guarantee a lease or a loan, you commit to make payments if the LLC is unable to do so.
You may be requested to pledge your house or another big asset as security for a business loan in some situations. If the LLC fails to meet its obligations, the creditor may seek repayment from your personal assets.
If your company is new, you may have to personally guarantee significant transactions. However, by building credit in your LLC's name, paying your payments on time, and demonstrating a track record of income and profit, you may be able to avoid some guarantees in the future.
Keep Just Enough Money In Your Company
If your LLC is prosecuted, the money in the LLC may typically be used to pay a creditor, but your assets cannot. To reduce your susceptibility, retain as little money in the firm as feasible and pay the remainder to the owners.
However, there are a few significant restrictions. If you owe a creditor and move money out of the firm, the activity may be considered fraudulent. Furthermore, if you do not maintain enough money in the company to cover its expenditures, a court may find you personally responsible for an alter ego theory for undercapitalizing your firm in order to deceive business creditors.
Explore Strategies to Protect Assets from Personal Creditors
If you are sued for personal conduct or as a consequence of a personal guarantee, your personal assets may still be at risk for LLC liabilities. There may be methods to safeguard part or all of your personal assets from these sorts of claims depending on where you live. In some cases, you can place assets in a trust that is immune from creditors, but you must usually do so years before there are any outstanding debts or judgments. Certain assets, such as your principal house and money in retirement accounts, may be immune from creditors.
Asset protection also keeps your business and personal funds separate, as well as having adequate insurance, which will assist protect your personal assets from business creditors. Although there is no such thing as 100% security, preparing ahead of time might help decrease your risk.
You can speak with an estate planning professional at the Law Office of Inna Fershyten to maximize your protection from liability for company commitments. Please contact us at (718) 333-2394.