One of the main reasons for having an LLC is to distinguish your business as a separate entity from you as a business owner. Having an LLC for your business legitimizes your brand, gives it more credibility, allows you to set up accounts in your business name, and ultimately helps protect your personal assets from any obligations or debts that your business may have. This gives you the flexibility to keep any issues or outstanding liabilities your business has from impacting your personal financial situation and helps keep you from personally having to cover for anything related to your business. Ready to learn more about how LLC Asset Protection works? Let’s get started!
Understanding an LLC’s Limited Liability Protection: A Comprehensive Guide
When you set up your Limited Liability Company, you separate yourself from your business, establishing it as a different entity and providing what we call “Limited Liability Protection.” This Limited Liability Protection (or LLC Protection) can be a substantial benefit if your business takes on a loan, has outstanding credit card debt, or in the event that your business is required to pay for damages or other liabilities.
This layer of protection can keep creditors of your business from going after your personal finances or assets (i.e. your personal bank accounts, home, cars, etc.). As with most things in business, there are always exceptions to this rule. If you do not properly manage your LLC, you may still personally be liable for your business debts or liabilities. If you have personally guaranteed certain loans or other business agreements, you can also be held personally responsible, since your personal guarantee is likely what allowed that deal to go through in the first place.
How Does Asset Protection Work for Limited Liability Companies (LLCs)?
Now that we’ve covered how this works at a high level, let’s get into the details!
Limited Liability
According to Investopedia, “a limited liability company (LLC) is a business structure in the U.S. that protects the assets of its owners from lawsuits and creditors concerned with the company’s business debts.” This definition is where we get the concept of “Limited Liability” and the main purpose behind establishing an LLC in the first place.
Separate Legal Entity
Your business status as a Limited Liability Company and separate legal entity is what keeps creditors from going after your personal assets. The business stands on its own even though you as an owner are a member of the LLC. In the majority of cases, if your business fails or goes bankrupt, your business creditors cannot pursue you for the amounts owed by your LLC. They can only go after your business bank accounts and assets.
Exceptions to Asset Protection
There are several exceptions to these rules of asset protection for your LLC. According to SwensonLawFirm.com, the main exceptions to these protections are if you as the owner:
- Sign a Personal Guarantee
- Personally Harm Someone
- Fail to Deposit Taxes Withheld from Employees
- Knowingly Act Fraudulently or Illegally
- Fail to Treat the LLC as a Separate Entity
As long as you avoid these major issues, having an LLC will protect you from being personally held liable for the actions of your LLC. Now that we have established the direct benefits of having an LLC and have given you specific situations to avoid, let’s get into more details about how you can further protect your personal assets as an LLC owner.
How to Protect Your Personal Assets as an LLC Owner
Obtain LLC Insurance
One of the first additional items you will want for your business is insurance specifically designed for your LLC. Speak with a licensed insurance agent about the types of coverage they recommend for your business and research the types of insurance that may be required by the federal government for your specific business type. Having this insurance will help cover many of your potential business liabilities so your business is covered by insurance in the event of mistakes or accidents involving your business and helps you maintain LLC asset protection.
Manage the LLC as an Independent Entity
To keep your business in good standing as an independent entity, you will need to establish clear separation between your personal and business assets. This means:
- Having separate personal and business bank accounts
- Keeping separate financial records for your business
- Signing paperwork and agreements for the business without a personal guarantee
Establish LLC Credit
Another way to protect your personal assets as an LLC owner is to establish a line of credit for your LLC. With your Employer Identification Number (EIN) you can apply for lines of credit and business financing so you can avoid personally injecting the business with cash for large expenses or investments. Establishing credit for your LLC can also help you purchase much needed equipment or office space that may be required for conducting your operations.
Keep Enough Money in the Company
And last but not least, one of the most important ways to protect your personal assets is to keep enough money in your company’s bank accounts. Creditors will not have any reason to go after your personal assets or finances if your company has enough to cover any outstanding debts or lines of credit. It can be easy to overextend your business financially or through contracts and other commitments, but this is where making smart long term decisions can help you avoid any sticky situations in the first place. Think smart, do your research, and consider your options carefully before signing contracts or making any large purchases.
What is the Importance of Asset Protection?
Even though no business owner wants to consider that their business could fail or that they may not be able to fulfill other obligations, understanding and implementing these steps to personally protect your assets can save you a lot of headache and financial loss down the road. Markets shift, industries change, and you want to make sure that regardless of what happens to your business, your personal assets and finances are protected. So does an LLC protect your personal assets? Yes! In most cases it does. Follow these steps to make sure none of the exclusions apply to you.
Conclusion
In conclusion, make sure you have your LLC set up and that you follow these instructions to keep your business running successfully for years to come! You will likely also want to consult with an attorney for specific legal advice about how to run your company in addition to these steps to make sure you are in compliance with all industry guidelines and federal regulations for your business. Contact us here if you want to learn more about how MyCorporation can help your business entity.
FAQ Section
How does forming an LLC protect my personal assets?
Forming an LLC protects your personal assets by establishing a separate legal entity used for conducting your business.
Are there any exceptions to LLC asset protection?
Yes there are, most notably if you sign a personal guarantee, personally harm someone, fail to deposit taxes withheld from employees, knowingly act fraudulently or illegally, or you fail to treat the LLC as a separate entity.
What are the steps to establish LLC asset protection?
The steps to establishing LLC asset protection are: (1) Obtain LLC Insurance, (2) Manage the LLC as an independent entity, (3) Establish LLC Credit, and (4) Keep enough money in the company
Can I convert an existing business structure into an LLC for asset protection?
If you are considering converting your existing business structure into an LLC, consult with a team that specializes in business formation like MyCorporation to get the job done right the first time!
How can I maintain LLC asset protection over time
To maintain your LLC asset protection over time, make sure you:
- Have separate personal and business bank accounts
- Keep separate financial records for your business
- Sign paperwork and agreements for the business without a personal guarantee