LLC Asset Protection Strategies (2024 Guide for Experts)
The business structure of an LLC can protect your personal assets from liabilities; however, there are certain strategies you can employ to ensure limited liability protection.
From my experience, running a business while keeping assets safe should be everyone’s top priority.
As a seasoned corporate lawyer, I am often asked for help by business owners and entrepreneurs who seek my guidance on maintaining personal liability protection. After consulting with Venture Smarter's team of legal experts, I created a comprehensive guide on LLC asset protection.
Read on and learn the best protection strategies and circumstances to avoid personal liability.
Quick Summary:
- Members of an LLC can protect their personal assets by employing strategies to address debts and lawsuits against the company.
- These strategies include proactive business planning and avoiding circumstances that may expose your personal assets to liability.
- According to The Hartford, the average monthly cost of a general liability insurance is $340.75.
- Based on my experience in the business industry, the best way to protect your personal assets is to legally separate corporate funds and keep track of all financial transactions.
Strategies for Personal Asset Protection
Venture Smarter recommends the following strategies to keep your personal assets protected from liabilities incurred by the LLC:
1. Open a Business Bank Account
I always stress the importance of opening and maintaining a business bank account to separate the company's finances and build credit for your LLC. Most banks, including Bank of America, require specific details and documents to open and maintain an LLC bank account [1].
All financial transactions of the business must be confined to the account and maintain records of all payments, loans, and invoices.
2. Obtain Liability Insurance
Obtain the right insurance based on the line of business and structure of your company.
The policy would protect the company's finances as well as the members' personal assets from debts and other legal action.
3. Establish a Trust
A business trust authorizes an individual or a company to distribute income to designated beneficiaries. Essentially, a trust transfers the ownership of assets to protect liability from debt.
In my experience, an irrevocable trust is best suited for businesses since the assets are protected from creditor claims.
Ways an LLC member Can be held Personally Liable
You may also protect your personal assets by being aware of the circumstances that put them at risk.
1. Undercapitalization
Undercapitalization occurs when the owner(s) deliberately underfunded the business to limit the amount of liability. If the practice is proven and rendered judgment, creditors may pursue the personal assets of the members.
2. Personal guarantees
Any personal guarantees made and signed by a member, to obtain or extend a loan would forfeit limited liability protection.
The personal assets of the guarantor can be used to settle the loan, if the company forfeits.
3. Use of property as collateral
By using personal property as collateral for a business loan, you automatically grant the lending institution the right to claim the asset if the debt is not settled on time, a scenario Venture Smarter advises clients to consider carefully.
For mortgage and home-equity candidates, lenders typically provide the most favorable interest rates when their Loan-to-Value (LTV) ratio is at or under 80%, as reported by Investopedia [2].
Typically, a lower Loan-to-Value (LTV) ratio increases the likelihood of loan approval and generally results in lower interest rates, reducing the risk of losing your asset to the lender.
4. Lawsuits/fraud
Personal lawsuits, such as fraud or any business wrongdoing, expose the person's assets to liability. In such cases, the company's assets remain unaffected, but the company's ownership may change, with the particular interests of members being seized.
"Change is not a destination, just as hope is not a strategy."
- Rudy Giuliani, Former Mayor of New York & Lawyer
5. Tax liabilities
Since an LLC has a pass-through tax classification, the members are responsible for business tax liabilities. That’s why Venture Smarter stresses reporting and filing taxes on time.
Similar Articles:
- What Happens to Assets of a Dissolved Company
- How to Transfer Personal Assets to an LLC
- What Is a Charging Order Against an LLC
- Why Buy Property Under an LLC
Why Should I Use An LLC For Asset Protection?
You should use an LLC for asset protection, since the business structure provides limited liability for its members.
Essentially, the company is regarded as an independent entity, separate from its owners, as such, any debts or liabilities incurred by the business protects the members’ personal assets.
FAQs
Does a Single-Member LLC Protect Your Personal Assets?
A single-member LLC business entity does not protect your personal assets since there’s no separation between the owner and the business entity.
Can My LLC Protect Business Assets from Lawsuits?
Your LLC can protect business assets from lawsuits since the business structure offers limited liability protection.
References:
- https://www.irs.gov/irm/part5/irm_05-001-02
- https://www.investopedia.com/terms/l/loantovalue.asp#citation-7
