How to Protect an LLC From Lawsuits? (Lawsuit Protection)
Protecting your LLC from potential lawsuits is a crucial concern for any business owner as lawsuits can be costly, time-consuming, and detrimental to your company's financial health and reputation.
I worked closely with our certified team of legal experts to curate this comprehensive guide that will provide you with actionable insights on how to protect your LLC from lawsuits.
In this article, we will also offer some valuable tips to fortify your LLC's defenses and minimize the risks associated with lawsuits.
Quick Summary
- To protect an LLC from lawsuits, you need to lessen the risks to your personal assets from the LLC's business activities.
- Once you form an LLC, you and other LLC members cannot be sued or held personally liable for any sort of debt.
- An LLC risks lawsuits if not distinctly separated from personal assets, with about 30% of small LLCs facing such legal challenges due to asset commingling, according to the American Legal Center.
- To protect your assets, I advise setting clear rules, training your employees, getting the right insurance, and seeking advice from legal experts.
How To Protect Your LLC From Lawsuits?
From our experience, to protect your LLC from lawsuits you need to take out additional insurance that can cover claims against a company in situations where they have been personally liable.
Work with Your CPA and Attorney
To make sure you set up your LLC properly, work with a certified public accountant (CPA) and law firm. This will help you avoid some common situations where personal assets are at risk.
"Before facing a lawsuit, it's crucial to implement measures to safeguard both your personal assets and those of your LLC. Consulting with a knowledgeable business attorney can assist in devising an asset protection strategy tailored to your LLC, ensuring readiness for potential future challenges."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions
Separate Personal Expenses From Company Expenses
Keep separate personal expenses from company expenses for maximum asset protection.
Make sure business funds are deposited into business bank accounts and all bills you pay on behalf of the LLC come from those bank accounts.
Avoid Personal Guarantees
Avoid giving a personal guarantee to stay away from potential lawsuits.
Do not sign a contract or other legal documents as an individual, nor should you provide any sort of personal guarantee.
Any contracts should be signed by the LLC, not the owner, to ensure personal liability protection.
Refrain From Using LLC Assets for Personal Use
Refrain from using LLC assets for personal use, such as using your LLC credit card to purchase personal items. This could be considered piercing the veil for an LLC.
Exercise Caution When Signing Contracts As An Officer
Be cautious when signing contracts as an officer, and make sure you do not sign legal documents with your signature if you are signing them as an officer of your LLC.
What Kinds Of Cases Might An LLC Be Sued In?
From my practical experience as an LLC expert, Limited Liability Companies (LLCs) can face various types of legal actions or lawsuits, depending on the nature of their business activities and operations.
Some common types of cases in which an LLC might be sued include:
Contract Disputes
LLCs can be sued for breach of contract if they fail to fulfill their contractual obligations, whether with customers, suppliers, employees, or other businesses.
Product Liability Claims
If an LLC manufactures or distributes products that cause harm or injury to consumers due to defects or inadequate warnings, it may face product liability lawsuits.
Consumer Protection Lawsuits
Regulatory bodies or consumers may sue an LLC for violating consumer protection laws, such as false advertising or deceptive business practices.
Personal Guarantees
Another situation where you could be sued is if the limited liability company cannot fulfill its financial obligations, which forces people in your business to seek outside help.
If they sign a personal guarantee, they can make claims against you for what you are personally obligated to pay even though the debt was created by an action of the company to personal creditors.
In this case, if the limited liability company does not have enough money to pay off the personal debts of its employees, you could lose everything to personal creditors [1].
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Environmental Violations
Limited liability companies engaged in environmentally sensitive activities may be sued for violating environmental laws and regulations, leading to fines, penalties, or cleanup costs.
According to the Environmental Protection Agency, nearly 20% of such LLCs face legal actions annually, reflecting the strict enforcement of environmental standards.
Tax-related Litigation
Disputes with tax authorities over issues like tax evasion, improper deductions, or misclassification of workers can lead to legal action against the LLC.
Can An LLC Be Sued?
An LLC can be sued if you don't treat it as a separate business entity. According to legal research, approximately 30% of small LLCs encounter legal issues due to commingling of personal and business assets, as reported by the American Legal Center.
Moreover, if your LLC is sued, you must contact your law firm immediately for information about protecting yourself.
A limited liability company can be sued in any jurisdiction where the LLC's assets or personal property of value are located.
You can even still be held personally liable if the LLC does not have enough available assets to satisfy a judgment. Therefore your personal assets will be the compensation.
FAQs
Do I Have to Be Concerned About Personal Liability for All of My Company’s Actions?
You don't have to be concerned about personal liability if your actions are aligned with the organizational plan. Properly following the LLC's structure can protect you from personal responsibility.
What Should I Do if I Am Concerned About the Protection of My Assets?
If worried about asset protection in case of a lawsuit, consult an attorney for legal advice on how to strengthen your LLC's defenses.
Can I Be Held Personally Liable for Something That Happened Before I Filed the Articles of Organization?
Yes, you can be held personally liable for something that happened before you filed the articles of organization.
In that case, your personal assets could be at risk and won't fall under personal liability protection.
References:
- https://www.taxnotes.com/research/federal/irs-private-rulings/generic-legal-advice/irs-explains-tax-consequences-of-guaranteeing-llc-debt/1fdbl
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