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Creating an LLC can help protect personal assets from your business creditors or judgments. LLC protection is not absolute but you can help safeguard your assets. Look to these best practices for the best benefit.
Keeping personal assets and LLLC transactions completely divided is one of the biggest ways to add protection. The LLC should have a separate bank account in the name of the LLC which all income and expenses flow. Mixing personal assets with the business assets can open up the ability for creditors to reach personal assets.
If someone files a lawsuit accusing you of wrongdoing—whether it’s negligently maintaining your building, wrecking the company van or defrauding a customer—your LLC won’t protect you from personal liability. And the judgment in a personal injury lawsuit can be financially devastating.
For this reason, it is important to have a good liability insurance policy that will cover both you and your business if you get sued.
Personal guarantees are a major reason why small business owners become liable for company obligations. If you personally guarantee a lease or a loan, you agree to make payments if the LLC cannot. In some cases, you may be asked to pledge your home or another large asset as collateral for a business loan. If the LLC defaults on the obligation, the creditor may go after your personal assets to satisfy the debt.
If your business is new, it’s likely you’ll have to personally guarantee large transactions. But you may be able to avoid some guarantees in the future by establishing credit in your LLC’s name, paying your bills on time, and showing a track record of revenue and profit.
If your LLC is sued, the money that is in the LLC can be used to satisfy a creditor, but your personal assets usually cannot. To limit your vulnerability, it makes sense to keep as little money as possible in the company and pay the rest to the owners. You cannot transfer money out in order to prevent payment to a creditor.
It is important that you understand that Steelestone Legal is a legal document preparation service. We are preparing documents at your request—and the documents are being prepared by a Certified Legal Document Preparer. This individual is not an attorney and cannot represent you in the practice of law. The information provided is not considered legal advice and is provided for educational use only. Any information provided to Steelestone Legal will be kept confidential and will not be sold.