LLC personal asset protection helps protect the owners and members if the business is sued. It can also protect the business if one of the owners or members is personally sued.
An LLC is an excellent way to secure your personal assets, however, there are other steps you will need to complete for further protection. Creating a limited liability company is an important part of safeguarding your assets from being applied to satisfy the needs of business creditors.
However, it is important to understand that an LLC is not absolutely safe. For the strongest level of liability protection, you may want to consider the formation of an LLC asset protection plan.
Go Vitru’s (LLC) Limited liability company guide.
The Fundamentals Of An LLC Limited Liability Protection Plan
When an LLC is formed, you are creating a new business that is a separate entity from yourself. Limited liability protection is the best way to provide this form of limitation.
If the debts of an LLC are not paid, creditors have the legal right to seize the bank accounts and assets of the LLC. However, the personal belongings of the individual, such as bank accounts, housing, automobiles are all considered exempt. The owner of the LLC will only expose how much money they have invested in the LLC.
Even with these types of restrictions, an LLC liability protection plan is an essential part of asset protection. Let’s take a look at a few additional pointers to help you maximize it.
Everything You Need To Know About LLC Personal Asset Protection
LLC Insurance
An LLC is not able to protect you in the form of personal liability if an individual files a lawsuit claiming your wrongdoing, whether it is a case of fraud, property negligence, or vandalism of property.
With this in mind, it is essential to have solid liability insurance coverage on hand. If you are your business is sued, this type of policy is going to offer you additional coverage from any legal damages that may be awarded against you and your business.
Keeping Business and Personal Separate
Shareholders that mix their personal property with any company assets have the ability to be held liable as an alter ego of the firm in corporate law. There is strong support that the court will typically extend this form of responsibility to LLC owners.
It is essential to keep all LLC funds and records separate from any personal finances to avoid the probability of alter ego liability. The LLC needs to have its own bank accounts, credit cards, and an additional account to receive payments. The name of the LLC needs to be placed on all letterhead, invoices, contracts, purchase orders, as well as any other important documents.
Additionally, your employees will be able to make a solid decision in regards to any issue without the need to worry if you are in favor or opposed to the decision. Even in the event that something was to go wrong, there is no need of them to worry about being fired because you are not personally involved.
Business Credit
Personal guarantees are one of the most typical reasons that so many small business owners find themselves responsible for company obligations. If an LLC is unable to make a payment, you agree to pay them if you have personally guaranteed on a loan or lease.
In some situations, you may be obligated to place a home or other personal asset up for a business loan. If the LLC fails in its overall responsibilities, the creditor may choose to seize personal assets to pay off the debt.
If your business is new, you can almost always expect to have to personally guarantee any form of significant transaction. However, when you form credit in the name of your LLC, demonstrate consistent revenue, and pay all bills on time, you will have more options in the future.
Keep Minimal Money in the Company
Creditors have the ability to use company assets to pay off debts. However, they are not able to use personal assets. With that in mind, it is generally wise to keep as little money in the business accounts as possible in an effort to minimize risk.
There are some limitations involved in this plan. If you already own money to a creditor and begin moving money out of the business, it could be considered a fraudulent transfer.
If you do not keep enough cash in the business to cover the necessary costs, a court may deem that you are liable for the undercapitalization of the business in an effort to defraud business creditors.
Safeguard Assets From Personal Creditors
It is important to realize that personal assets may be in jeopardy if legal action is taken against you as the result of a personal guarantee. However, there are certain strategies in many states that can still help save the majority of your personal assets.
In many jurisdictions, you may place your assets in a trust that is safe from creditors, however, this must be done years before there is any type of judgments or delinquent debts. Some property, such as retirement funds and your primary residence will be protected from creditors.
In order to find out if you would like to arrange your assets to help protect them from company liabilities, you should begin by consulting with a bankruptcy attorney or estate planner.
It is essential to business and personal finance separate, in addition to keeping proper insurance as a measure to keep your personal finances safe from commercial creditors. While there is no such thing as absolute protection, preparation is the key element to help avoid financial disaster.
Learn more on LLC operating agreements here.