People start to use limited liability companies LLCs to limit their risk in business ventures and have limited liability protection.
Although an LLC is designed for legal protection from lawsuits and other liability issues, there are certain types of cases in which the measures provided by the LLC will not protect the LLC owner or their personal assets.
Can An LLC Be Sued?
An LLC can be sued just like any other business, and there are some cases in which the owners or officers of an LLC can even be sued personally.
If your LLC is sued, you must contact your attorney immediately for information about protecting yourself.
An LLC 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.
What Kinds Of Cases Might An LLC Be Sued In?
Business owners can not enjoy the limited liability protection privilege, especially those who are sued personally for something that happened within their business can be liable in claims brought under:
- Breach of contract
- Personal injury such as negligence
- Product liability
If one of your employees is misusing company time for personal activities, you may be sued as an LLC.
You can be held personally liable if someone breaches the law while working for your firm, and you're sued because of it.
Product liability claims can arise if an LLC makes a product that causes injury or damage to people or property, such as selling harmful or mislabeled food.
Personal injury claims can include cases involving negligence; for example, if an accident occurs at your place of business, you serve alcohol to minors or allow smoking in a no-smoking area.
Situations Where Your Personal Assets Are At Risk
An LLC is a legal business. This company protects you from lawsuits and liability protection.
However, if someone does not like your company, they can sue you personally; even if you are not involved with the business, your personal assets can be held under personal liability.
If the lawsuit is about something else, it could still affect what happens to your personal property.
In a lawsuit, the individual who acted wrongfully does not have to be an officer of the company for that person's personal assets to be at risk.
A Limited Liability Company can also provide protection from being personally sued if the company is fined or found guilty in a civil case unless a manager did something illegal on purpose.
Even though it was not your fault, you could be held responsible for your manager’s actions and only have the personal assets and protection offered by your LLC.
Did Not Treat Your LLC as A Separate Entity
You may be sued personally if you do not consider your LLC a separate legal entity.
This implies that personal and corporate expenditures should never be mixed.
To ensure that the company is properly structured for tax purposes, you must keep track of your accountant and pay all of the firm's income from company accounts.
You must also seek legal advice in any situation where you are being sued.
Another situation where you could be sued is if the LLC 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 LLC does not have enough money to pay off the personal debts of its employees, you could lose everything to personal creditors.
Signed a Contract as an Officer
An LLC is a legal entity that insures your personal belongings only if you follow all laws and regulations, including agreeing to be a manager without signing as an individual.
Even though you acted in good faith without any intent to defraud, you could lose protection because of your action, even if it was done in good faith.
You would be financially responsible for damages incurred.
Relying on an LLC To Protect Your Assets
Before establishing an LLC, it's a good idea to meet with a CPA and an attorney to make sure you know what your responsibilities will be in terms of taxes, filing costs, and maintaining the organization's structure.
While using an LLC can be a useful asset protection tool if done successfully, relying on it too much to protect your assets might leave you unprotected and vulnerable in the event of a lawsuit.
How To Protect Yourself From Personal Liability?
LLC owners may protect themselves from personal liability by having their company take out additional insurance that can cover claims against a company in situations where they have been held 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 attorney. This will help you avoid some common situations where personal assets are at risk.
Separate Personal Expenses From Company Expenses
Keep operating funds separate from personal accounts. Also, make sure business funds are deposited into a company account and all bills you pay on behalf of the LLC come from that account.
Avoid Personal Guarantees
Steer clear of signing contracts as an individual or providing personal guarantees, even if signed in good faith. Any contracts should be signed by the LLC, not the owner.
Refrain From Using LLC Assets for Personal Use
Do not use company assets or resources to benefit yourself, 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
Make sure you do not sign documents with your signature if you are signing them as an officer of your LLC.
What if I Just Had the Best of Intentions When Signing a Contract as an Officer?
Even if you are acting in good faith, without any intent to defraud, you can still lose protection from personal liability by breaching this aspect of your LLC's organizational structure.
Do I Have to Be Concerned About Liability for All of My Company’s Actions?
As an LLC owner or officer of your LLC, you will not be held personally responsible for your business's actions if they are in line with the organizational plan.
Do I Need to File Additional Paperwork to Protect Myself?
No additional paperwork is required. However, you can avoid personal liability by protecting your company with appropriate insurance, not signing contracts or other documents in your name as an individual.
What Should I Do if I Am Concerned About the Protection of My Assets?
If you are still concerned about how your LLC would hold up in court if sued, talk to an attorney for legal advice.
Can I Be Held Personally Liable for Something That Happened Before I Filed the Articles of Organization?
Yes, suppose you are an LLC owner or officer of a company that is ever sued or incurs any debt, even before formal incorporation.
In that case, your personal assets could be at risk and won't fall under liability protection.
In conclusion, when you start your LLC, make sure to protect yourself from personal liability by avoiding unnecessary signing of contracts in your personal name and by protecting yourself with the appropriate insurance.