Many business owners choose LLC’s as the primary formation for their companies to protect their assets. As LLC is an acronym of a Limited Liability Company, it limits business owners’ liability, but this protection is limited, as suggested by the name.
Companies are always vulnerable under various circumstances, even when they are LLCs, but on the periphery an LLC offers the best protection available.
How Does An LLC Protect You?
The primary LLC protection deals with the liabilities and debts incurred by the business. With an LLC, in most cases, you are safe from having your assets seized to pay for the obligations and liabilities incurred by your company. However, it will be an exemption if you set yourself up as a personal guarantor whilst taking advantage of a loan.
Apart from the aforementioned scenario, there are some other considerations where an LLC proves to be very helpful. One such case is if your business is sued and found guilty of wrongdoings by business co-owners and employees, your assets will not be seized, as long as you didn’t have a part in the transgressions.
However, if you had personal negligence or played any part in the fraud, your assets’ protection will no longer be valid under LLC. One of the pervasive cases in this context is where business owners intermingle their finances with their finances and when they commit tax fraud.
Additionally, if you signed a contract acting on your own instead of as an LLC’s representative, your assets will be in line to be seized when business unsettles. Similarly, it is also essential to keep the LLC aligned with the state laws, and if it is not, you may again be vulnerable to lose your assets.
Now that I’ve summarized how an LLC protects you, let us discuss the LLC asset protection in detail and understand the legal and technical.
How Does An LLC Protect Your Assets?
As the old saying goes, “You aren’t in business until you’ve been sued.” – As belligerent as businesses are these days, to be summoned into the court, you don’t need to be a bad guy.
Merely transacting your business with the general public, you open yourself to a world of possible litigations. No matter how arbitrary the lawsuits are, legal fees and the destruction that it leaves are crippling.
However, the states realize that if entrepreneurs are forced to put their livelihoods at risk to start a business, only very few companies would stand. Therefore, LLCs come into play to protect individuals’ assets (your house, vehicles, financial investments etc..) and let the business flow smoothly.
So you can rest assured that your personal assets and bank accounts remain in a safe ringfence.
Real Life Examples
For example, a judgment creditor, or someone who has won a case and is owed money by the business, is restricted only to the LLC’s properties. You would have kept just enough money in your LLC to keep it fiscally stable if you were financially savvy. The remainder is then paid to the owners of the business. The LLC also allows you to move any of your other properties to a different asset management instrument if your company is doing well.
What if your LLC’s assets aren’t enough to pay off your debt? That’s when a clever creditor would come for your assets. The sad reality is that some people sue an LLC with little to no assets on purpose. They do this in the hopes of breaking into the LLC and gaining access to the member’s personal properties.
That is why it is vital to have your LLC founded by a seasoned professional firm.
These forms of predatory litigation are unlikely to succeed if your LLC is appropriately set up. Your LLC will act as a firewall – stopping your legal opponent from accessing your personal properties.
How Does An LLC Protect Real Estate?
When answering what an LLC protects against, real estate is one of the big names. Putting your real estate into the hands of an LLC is the best way to protect it from potential litigations. Bear in mind, however, that some mortgage lenders are reluctant to lend to LLCs if a property is being financed.
Similarly, certain mortgages have a “due on sale” provision that requires you to pay the entire balance owed on your mortgage when it is transferred to another company. As a result, you can check with your lender before moving any properties to an LLC.
Next, as discussed earlier, if an LLC declares bankruptcy, its members must not pay any of the company’s debts with personal funds. So, if you own several properties, each one can be put in its LLC, shielding it from possible claims resulting from the other properties.
However, if you buy three properties and put them together into one LLC and if one of the properties is issued with or has a liability, the other properties are all at risk because an LLC effectively acts as an umbrella under which all the properties belong, and hence any/all of the assets may be seized.
Each property will be insulated from any harm resulting from one of the other properties if each is put in its LLC as a separate company. Any other confidential assets will also be safeguarded under the banner of LLC liability protection.
Legal Protection – LLC .vs. S Corp
Like that of a corporation, the risk of an LLC member is limited to the loss of their investment. However, an advantage of the LLC over the S corp in terms of asset security is that the LLC provides you with more protective ownership options. A personal creditor of a member can only seek a charging order against the LLC’s interest.
A family limited partnership (FLP), a trust, or another company, for example, may all own an LLC. However, these bodies are unable to own shares in S corporations. Individuals are primarily required to hold their stock. S corps share makes estate and asset protections more complicated.
More significantly, an LLC ownership interest is much more creditor-protected than S corp shares, which a stockholder’s creditors can quickly acquire. A member’s interest in an LLC is shielded from creditors in the same way as an LLC partner’s interest is protected.
Finally, since an LLC can choose to be taxed as an S Corp, it can be argued that the S corporation as a corporate entity would become obsolete over time.
Corporations can be appropriate only for businesses planning to go public or with large, complex equity structures. An S corp cannot go public because its ownership is limited to 100 shareholders. It will be limited to a basic equity arrangement as a result of this.
An S corp is only preferred under extraordinary situations over an LLC.
Frequently Asked Questions
- Does an LLC protect me?
Depending upon your actions, there may be some exemptions, but overall, yes. An LLC protects you against the litigations involving the business that you are heading.
- Does an LLC protect your business name?
As an LLC or corporation applies to register with the state by filing Articles of Organization or Articles of Incorporation, its business name is covered in that particular state. That means the state won’t let any LLCs or companies use the name.
- Does an LLC protect your business from creditors?
Yes, it does. Creditors of an LLC’s owner cannot get the LLC’s money or property to satisfy personal debts against the owner. However, an LLC owner’s creditors may attempt to collect from someone with an ownership interest in an LLC in several ways other than taking property directly.
- Does an LLC protect you from a divorce?
An LLC divorce clause can be included in your LLC operating agreement. Compared to the other terms in LLC that we’ve discussed earlier, which may help you defend your LLC interest from your partner, a divorce clause in an operating agreement protects the LLC’s other members.