A key step in protecting your personal assets from potential business creditors is forming a limited liability company (LLC). It’s a common assumption that the liability protection afforded by an LLC is absolute, but this isn’t the case.
If you want the best possible protection for your assets, then you need an LLC asset protection strategy. Here’s how.
Understanding LLC protection
When an LLC is formed, a new business entity is created. This new entity is legally separate from the business owners, which provides the limited liability protection. In general terms, this means that if the LLC can’t pay any debts it has, then its creditors can chase its bank accounts and assets, but not the personal assets of the LLC owner (such as property and cars).
If you open an LLC, then you only risk the amount of money you invested into the business. However, there are exceptions. Any debts that were personally guaranteed by the business owner are still their personal responsibility. It’s also possible to be liable for unpaid payroll taxes.
Even with these provisos, liability protection is important for your asset protection strategy. Here’s our suggestion for getting the most out of the protection from your LLC.
- Get LLC insurance
If someone sues you for wrongdoing you’re not protected from personal liability by your LLC. The types of wrongdoing include anything from not maintaining your building to defrauding a customer. If you lose a lawsuit against you, it can be financially devastating on a personal level. It’s vital to have a decent liability insurance policy that will cover your business and you personally should you ever be sued.
- Keep your LLC as an independent entity
Corporate law states that any shareholders that mix their personal assets with corporate assets can be held liable personally (alter ego liability). Courts can sometimes also extend this kind of liability to LLC owners.
To avoid any possibility of alter ego liability, you must keep LLC finances and records totally separate from your personal finances. The LLC must have its own credit cards and bank accounts. Any invoices, purchase orders, contracts and other important documents should have the name of the LLC clearly on them and always be signed on behalf of the LLC. This way it’s always clear to clients and customers that they are doing business with an independent entity and not the owner personally.
- LLC credit should be established
A major reason why small business owners eventually become liable for company debts is the personal guarantee. If a business owner personally guarantees a loan or lease, then they are agreeing to make payments if the LLC can’t.
Sometimes business owners giving personal guarantees will have to put their house or another large asset on the line as collateral. If the LLC then defaults, the creditor can go after these assets to pay the debt.
For new businesses, it’s often unavoidable for owners to personally guarantee some transactions. But it is possible to avoid some guarantees by establishing a line of credit in the name of the LLC, always paying bills on time and showing a paper trail of revenue and profit.
- Keep ‘just enough’ in the LLC
If you own an LLC and it is sued, then the money in the business can be used to pay the creditor, usually leaving your personal assets untouched. To decrease your vulnerability in this position, keep as little money as possible in the business. The rest should be paid to the owners.
There are limitations on this strategy. For example, if you already owe money to a creditor and transfer large sums out of the business, this could be construed as a fraudulent transfer.
If you don’t have enough money in the business to cover its expenses, then a court could hold the you liable using the alter ego theory. This would mean they believe you purposely underfunded your business to defraud creditors.
- Strategise to protect assets
Although it’s possible for your personal assets to be at risks if you are sued for personal wrongdoing or because you gave a personal guarantee, there are ways to create a trust for your assets and protect them from creditors that way. You need to do this before there are any actual debts or problems and before you can actually foresee them, so it’s a good pre-emptive measure to take.
There is no such thing as 100% protection when it comes to your assets, but planning ahead can put your mind at rest and go a long way to securing your future.
About Turner Little
Founded in 1998 in Yorkshire, UK, Turner Little is a specialist UK and offshore company formation, banking and corporate services provider. Our services include company formation, UK and offshore banking, asset protection, credit correction/repair, trademarking and trusts. Other services include Internet services, mail forwarding, wills and probate. Turner Little’s vision is to offer the best possible service, together with market leading products.
