LLC Protection Explained: What Does an LLC Protect You From?
A limited liability company is a business structure that offers personal asset protection to its members.
The Limited Personal Liability Protection reduces the risk of personal assets being taken should an accident occur at your place of work.
This type of legal protection helps shield you from the debts or claims made against your LLC by providing only the funds contained in the LLC to satisfy a debt or claim.
Personal assets, such as your house and car, are safe from being taken to pay for anything that might arise from incidents involving your place of business.
This protection is beneficial because it reduces your liability and protects your personal assets while giving you the ability to work freely, knowing that any mistakes made will not be your fault.
What Type of Liability Protection Do You Get with an LLC?
One of the primary benefits of forming an LLC is protecting your personal assets if the business fails or gets sued.
An LLC provides its owners, known as members, with protection against personal liability for certain debts and claims against the business.
This means that if you leave behind unpaid credit card debt when you close up shop, your personal credit is not typically affected.
However, limited liability companies do not automatically bestow personal liability protection on you.
LLC owners' liability protection depends on state law and the type of claim being asserted against the business.
Personal assets may still be vulnerable if you fail to form an LLC properly or maintain adequate insurance coverage.
Personal assets are easily shielded, though, if you form your LLC correctly.
Personal liability is a concern when people operate a business without establishing a separate legal entity to protect their assets, such as a corporation or a limited liability company.
Personal liability means that creditors of the business may take the owners' funds and possessions to satisfy outstanding business debts.
Personal liability protection involves the personal assets protected in the event of default, bankruptcy, or other claims against a business.
Is a Member of an LLC Personally Liable?
The answer to this question is entirely dependent on the state that you are in.
Most states with LLCs treat the LLC owner is not personally liable for any wrongdoing that their employees or co-owners of the LLC do.
This means there would be no personal assets used to cover any business-related debts, including lawsuits pursued by customers or vendors, fines issued by the state regulators, etc.
Some states are more concerned with the lawsuit protection of LLC members from personal liability than others. For example,
Texas protects members from personal liability better than most other states. If you are concerned about this for your business, you should consult with a member of your team who has experience with LLCs in your state.
A knowledgeable source will provide you with the proper guidance for putting together your LLC and understanding your legal obligations.
In most cases, members of an LLC are not personally liable. There are some exceptions for specific situations, such as when a member is responsible for reporting or paying withholding taxes.
Even in these cases, the legal burden of proof is typically very high.
Who Is Responsible for LLC Debts?
In general, LLC owners are not responsible for the debts of the LLC unless they personally guarantee debt or make another agreement to be held personally liable.
Who is held personally liable?
An LLC owner can be held personally liable in three specific instances: when an LLC member signs a personal guarantee, pays taxes as an LLC instead of an LLC entity, or makes a personal promise to creditors.
When LLC members sign a personal guarantee, they promise to pay the LLCs debts if the LLC does not.
These guarantees can be written into an LLC operating agreement or come from separate agreements between the LLC owner and creditor.
Your LLC’s Liability for Members’ Personal Debts
If you own an LLC with other people, the company needs to be protected from personal bank accounts because certain debts are considered personal for everyone involved in the business.
Shanavas Ameerkannu of Dubai Business Advisors explains that the owner’s personal assets are generally not at risk — the very structure of an LLC separates personal assets from business assets.
This protection is not absolute but it can offer significant peace of mind for business owners.
One way to protect the business from personal debts is to separate the business' bank account from anyone else's is a member.
Although an LLC member's personal bank account should not be directly connected to the business account, members can still deposit personal funds into company accounts.
A creditor might try to go after joint accounts owned by all the members, including personal bank accounts because it can access money in those other accounts under certain circumstances.
If you want to keep your personal and business assets separate, avoid personal accounts with balances below your business account.
This way, if a creditor goes after a joint account, you won't lose both the money in the business and personal accounts.
FAQs
Who Owns the Assets of an LLC?
The assets of an LLC are owned by the members, regardless of how much money they have invested in their membership interests. This is true even if there are more investors than members.
Do the Owners of the LLC Own Its Assets Equally?
The Members may divide up their ownership interests in any manner they choose; this includes giving some members bigger stakes than others. It's important to remember that no matter how equal or unequal the membership interests are, all members always own their equal share of each asset in the LLC.
Does an LLC Always Protect Your Personal Assets?
An LLC will typically protect the personal assets of its members, but not always.
If you plan to open an LLC to protect your personal assets, you must seek legal advice. The laws surrounding LLCs vary from state to state, so it's essential to work with a lawyer who knows about the rules and regulations for creating and administering an LLC in your state.
What Assets Are Protected in LLC?
An LLC protects the personal assets of its owners, but not all assets. It is crucial to determine if your business has personal or corporate liabilities before setting up an LLC.
What Does an LLC Not Protect You From?
An LLC does not protect its members from wrongful termination lawsuits or similar employment claims. These disputes are always personal and should be the subject of a will, trust, insurance policy, or other asset protection device.
LLCs do not protect their members from their own negligence or personal wrongdoing. Also, you can still be sued for damages related to your business activities and may be held liable for the debt of an LLC if you personally guarantee it.
Does Forming an LLC Protect Personal Assets From the Actions of Other LLC Members?
Forming an LLC provides limited liability protection, safeguarding personal assets from the actions of other LLC members. However, this protection is not extended to personal funds commingled with business funds, as that could potentially undermine the separation between personal and business finances.
