Does an LLC Protect Your Personal Assets?

Does an LLC Protect Your Personal Assets?

Setting up a business as a limited liability company (LLC) can protect the business owner's personal assets from being claimed by business creditors. An LLC creates a shield between business liabilities and personal assets. This means, in most cases, a lender can't force the owner to repay a loan taken out by the business. Nor can someone awarded damages in a lawsuit against the business require the owner to make good on it. The protection isn't perfect, and business owners may want to take other steps to protect personal assets from business liabilities. A financial advisor can discuss ways you can protect your personal and business assets.

LLC Personal Asset Protection

The owner of a business set up as a sole proprietorship is personally liable for any debts of the business. But other business structures, including LLCs and corporations, separate liabilities and assets of the owner and the business. As a result, an LLC owner's personal assets generally can't be claimed to satisfy a judgement against the business resulting from a lawsuit or unpaid debt.

If a creditor successfully sues an LLC, the creditor may claim assets of the business and sell them to collect a judgement. However, the assets of an LLC owner, including bank accounts and personal property, are usually shielded from claims against the business.

Because of this asset protection feature, an LLC is an important part of an asset protection plan for many business owners. The plan also often includes insurance, and may use other tools, such as asset protection trusts.

LLC Protection Limits

Does an LLC Protect Your Personal Assets?

LLCs won't protect personal assets from claims against the business in all cases. Timing is critical. The LLC has to be set up before the debt is incurred. Also, the LLC has to be created in accordance with the laws of the state, and ongoing requirements such as annual reports have to be maintained.

If the owner personally guarantees a loan to the LLC, creditors likely will be able to go after personal assets in the event of a default. Even signing loan documents without identifying the signer as a representative of the business may be construed as making a personal guarantee.

Courts may also "pierce the veil," which refers to removing the distinction between business and personal assets and liabilities if the owner commingles personal and business funds. Depositing business revenue into a personal account or paying business bills with a personal check can be enough to pierce the veil and make an owner personally liable for business debts.

An owner of an LLC is shielded from most business tax liabilities, with the exception of unpaid payroll taxes. Also, the owner can be personally at risk if the business breaks any laws or engages in willful misrepresentation, such as lying on a loan document.

Some lawsuits can get around LLC protections. For instance, if someone is injured by an act of the business, the owner may be held personally responsible. Also, if a lawsuit names the owner as well as the LLC, the owner may be held liable for any damages that are awarded.

Improving LLC Asset Protections

Does an LLC Protect Your Personal Assets?

Owners who want more protection than an LLC provides have several options. To begin, an owner can avoid doing anything that could let creditors pierce the veil. These include making personal guarantees and signing loan papers without identifying themselves as a representative of the business. Giving the LLC a credit history by establishing bank accounts and taking out loans in the business name can make it easier for a new business to get a loan without a personal guarantee from the owner.

Insurance is another part of strengthening protections. A general liability policy covering an LLC can pay out in the event of a negative judgement in a court case, so the owner doesn't have to.

It's also important to keep good records showing there is no commingling of personal and business funds. This means setting up and using business accounts to pay business expenses and avoiding putting business funds into personal accounts.

Owners may want to avoid leaving too much money in the LLC. Taking funds out of the LLC through a distribution to the owner puts those funds beyond the reach of most creditors. However, if the owner takes out so much that the LLC can't fulfill its obligations, a court may hold the owner personally liable.

An asset protection trust is another way to shield personal assets from business liabilities. These have to be set up well in advance of need, and may be irrevocable, meaning assets placed in them can't be taken back out. As a last resort, filing for bankruptcy can further protect personal assets from business losses.

Bottom Line

An LLC protects the owner's personal assets from most claims against the business. Commingling funds, personally guaranteeing loans and failing to keep good records are common ways owners unintentionally make themselves liable for business debts. Avoiding these missteps, as well as using other asset protection tools such as insurance and trusts, can provide generally reliable protection against business liabilities for many LLC owners.

Tips for Protecting Assets
  • Consider talking to a financial advisor about an asset protection plan. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
  • Just as an LLC can protect personal assets from business liabilities, an estate plan can ensure that your personal assets are distributed in accordance with your wishes after your death. Having a valid will, enabling powers of attorney, setting up a trust, making gifts and contributing to charity can all help your estate minimize taxes and support the causes and people you want to support.

Photo credit: ©iStock.com/Zhanna Hapanovich, ©iStock.com/AsiaVision, ©iStock.com/sturti

The post Does an LLC Protect Your Personal Assets? appeared first on SmartAsset Blog.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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