LLC asset protection: How to protect your personal assets as an LLC owner
Establishing an LLC can protect personal assets of the owners but in order to ensure the personal protection, it is important to take certain important steps.
Formation of an LLC is the first step towards security of personal assets, which people face when they are obliged to pay the business creditors.
The liability protection by LLC is not the only element that can save owners from legal trouble. The owners must take important strategic measures to properly plan an asset protection strategy through their LLC.
Understanding an LLC’s Limited Liability Protection
Whenever an individual establishes an LLC, he or she is actually separate from the legal troubles and obligations of the LLC. This clear separation and distinction between personal assets and assets of LLC is called limited liability protection.
Whenever an LLC is unable to pay its debts then the creditors can go after the assets of LLC to satisfy their credits. In this case, the personal bank account, home and any possession by the owner are safe from the legal obligations of paying credit to the debtors. The only amount of the owner at risk is the one that he or she has actively invested in the LLC.
There are certain exceptions in this particular scenario,
‘The owners of LLC are obliged to pay the debts that they personally guaranteed. They can be held liable for their own wrongdoings and unpaid payroll taxes’
Despite the presence of such kind of restrictions, liability protection is still the most favorable feature of LLCs. This plays an important role in the protection of assets of the owners.
Here are some important tips and strategies that LLC owners must consider to take full advantage of limited liability protection by the LLC,
Obtain LLC Insurance
When people are accused of any wrong doing either through their negligence or they have committed fraud to any business, client or customer then LLC is not able to protect their personal assets. There are severe financial consequences when the judgement is against the owner of LLC for any kind of wrongdoing or breach of law. The only way to stay immune to the lawsuits in such cases is to have a sound liability insurance policy that easily covers the owner as well as his/her business.
Maintain Your LLC as an Independent Entity
Mostly those shareholders and investors land themselves in hot waters who are unable to separate their personal assets from the assets of LLC. Due to this mixed-up situation the court may extend liability to the owners of LLC.
The best way to avoid such kind of trouble is to keep the records of LLC and finances totally separate from the personal bank accounts and transactions. There should be a separate bank account of LLC and its credit cards. All the purchase orders, invoices and contracts should have the name of LLC on them and should be signed on the behalf of LLC. This is a clear way to let everybody know who is making any deal with you that what kind of deal they are getting into and you are not personally responsible for any default that happens at the LLC.
Establish LLC credit
When you personally guarantee someone to payback any kind of loan that actually comes from the LLC operations then you are obliged to pay the loan when LLC cannot make those payments at the stated time. In these types of situations LLC owners are obliged to pledge their home or any other large asset to cover the collateral for a business loan. In that case, when the LLC cannot pay its financial obligations then the next legal step is to make up the loss from the personal assets of LLC owners.
If you establish a credit on the name of your LLC then you can avoid all these legal troubles. You can diverge these personal guarantees by offering an alternative route through LLC to pay bills on time and show a track record of revenue and profit.
Keep Just Enough Money in The Company
When creditors approach LLC to satisfy their debts then the LLC is obliged to pay the loan at the stated time. This is only possible if the LLC has extra money in its bank account so that the owners are not vulnerable to the legal troubles that arise from insufficient balance in the bank account of LLC.
There are certain limitations to that as well, for example, if an LLC owner already frauds a creditor and transfers money from the account of LLC then that transaction is considered as a fraudulent activity. Contrarily, if the owner is unable to maintain a certain number of financial resources in the bank account of LLC, then court may send legal notification to the company for an alter ago theory of undercapitalizing the business.
Explore Strategies to Protect Assets from Personal Creditors
It is clear that there are some situations where LLC cannot protect you against legal troubles especially for personal wrongdoings or personal guarantees. There are certain laws according to the states that you need to understand and protect your personal assets from these types of legal claims.
You can put the financial resources into a trust that is protected from creditors and it is important to do this step years before there arises any unpaid debt or judgement against you. You can put a property, a money in retirement accounts which are automatically immune to the approach of creditors.
You can also take help from estate planning and bankruptcy attorneys who can help you structure a systematic plan that will protect your personal assets from the liability of any business obligation.
It is important to keep a proper and distinct separation between personal finances and bank accounts of LLC through proper insurance. Although it’s not 100% guaranteed that your personal assets will be protected against uncertain liabilities but at least you will lower the possibility of risk that most LLC owners face when they do not do things systematically.