One of the primary purposes of setting up an LLC is to protect your personal assets. But many LLC owners do not understand the limitations of LLC protections.
Did you know there are steps you can take now to protect your LLC from lawsuits down the road? Understanding the potential liabilities you could face as an individual will help you protect your financial future.
If you or your LLC is already being sued, an experienced business lawyer can help. Adam Curley of The Curley Law Firm has represented business clients in legal disputes for years. He can help you understand your options for defending yourself and your LLC against legal action. Contact us today.
How Does an LLC Protect My Personal Assets?
When you set up an LLC, the LLC is a distinct legal entity. Generally, creditors can go after only the assets of the LLC, not the assets of its individual owners or members. That means that if your LLC fails, you are risking only the money you invested in it, not your home, vehicle, personal accounts, etc.
If My LLC Is Being Sued, Are My Personal Assets at Risk?
Although the LLC generally shields assets of LLC owners, there are some circumstances where an LLC owner may still be personally liable.
Personal Wrongdoing
If you personally did something wrong, your LLC won’t shield you from liability. For example, if you negligently cause injury to someone when driving the company van on a delivery, you can be held personally responsible.
You are also responsible for any fraudulent actions you may commit, such as lying on a loan application or making fraudulent misrepresentations about the business.
Personal Guarantees
If you agreed to personally guarantee a loan granted to your LLC, you will be liable based on the terms of the guarantee. If the LLC fails to pay back the loan, the LLC’s creditor will be able to reach your assets.
Alter Ego
If you fail to treat your LLC as a separate entity, it is possible that you may be held personally liable under an “alter ego” theory. This occurs when you mingle your personal assets with the LLC’s assets, use the LLC to pay your personal expenses, or otherwise treat the LLC as if it were an extension of your own finances.
You also need to make it clear to creditors and customers that they are dealing with the LLC rather than you personally. Signing contracts, invoices, etc. with your own name instead of on behalf of the LLC may raise a question about whether the LLC is really distinct.
What Steps Can I Take to Protect Myself and My LLC?
There are a number of things you can do to protect both your personal assets and those of your LLC in case of a lawsuit. Most of these are steps you need to take before you get sued. A good business lawyer can help you set up an asset protection plan for your LLC so you can be prepared for whatever the future brings.
Get Good Liability Insurance
Your LLC should carry liability insurance that covers both the LLC and its owners. If someone sues your LLC, a judgment against the LLC could bankrupt your business or deprive it of its assets.
Likewise, as discussed above, if the lawsuit was based on something you did—such as negligently injuring a customer—the plaintiff could go after you personally if the insurance doesn’t cover their damages.
Don’t Mix Personal and Business Assets
To protect yourself against alter ego claims, it is important that you keep your business and personal assets separate. Keep careful accounts. Don’t use LLC funds to pay your personal credit cards or bills.
Put business assets, such as vehicles and equipment, in the name of the business. Leases, credit cards, bank accounts, etc. should also be in the business’s name.
Build Your LLC’s Credit and Pay Off or Refinance Debts You Have Personally Guaranteed
When you first start a business, you may have to personally guarantee a loan to the LLC to get the bank to issue the loan. But to do this, you have to put up personal assets, such as your home, as collateral. This is a scary situation to be in, and you don’t want it to persist any longer than necessary.
To build your LLC’s credit, be sure to pay all the LLC’s bills on time. Keep careful records of your profits and losses to show banks the LLC’s viability. Then when your LLC’s credit is strong enough, work to reduce your personal liability by paying off or refinancing those early loans.
Don’t Keep Too Much Money in the LLC
All LLC funds can be used to satisfy judgments against the LLC. Although you need to keep enough funds to pay the LLCs bills, payroll, and other obligations, extra money in the LLC accounts can make the LLC unnecessarily vulnerable.
You probably want to consider either distributing extra funds as profits or reinvesting those funds to grow your business.
Put Personal Assets in a Trust
Beyond the liability shield created by your LLC, there may be steps you can take to further protect your personal assets. For example, you may be able to put them into a trust.
This is one step you need to take long before creditors come calling. If you transfer your assets elsewhere just before defaulting on a loan, this can be viewed as fraud. A knowledgeable business attorney can help you determine what strategy makes sense for your circumstances.
Use a Series LLC
Texas law allows for a special type of LLC called a series LLC. You can break a series LLC down into multiple sub-companies that have separate accounts, hold separate assets, and have different functions. If someone sues one of the sub-companies, the assets of the other sub-companies will have protection.
What Can The Curley Law Firm Do for Me?
If you or your LLC is being sued, give The Curley Law Firm a call. Adam Curley can help you determine whether your assets are at risk and work to build a defense strategy that will protect you and your business.
Or if you want to protect your LLC against future lawsuits, Adam Curley can talk to you about your business’s individual needs and help you craft an asset protection plan. Contact the Curley Law Firm today to learn what we can do for your business.