Liability Protection for Your Business: Is An LLC Right For You?

Risks are a huge part of running a business, and thus, a business owner needs to be aware of their liability protection options. Under circumstances where a business is sued, a limited liability company (LLC) protects the owner’s personal assets from being used.

For example, as an LLC, debtors can only go after the business’s assets if your company is sued by debtors. With sole proprietorships and partnerships, the owner’s personal assets remain exposed for debtors to obtain if they sue the company.

An LLC is considered to be a separate entity, completely separate from its owners, meaning it can be sued separately in the eyes of the law. You’re protecting your personal assets (your house, cars, and other property) from being associated with your company by forming an LLC as opposed to a sole proprietorship or partnership Liability is an LLC’s biggest advantage.

An LLC is also much simpler to form than a corporation. Below is a brief look into the liability protections of an LLC.

Limited Liability Company (LLC)

The protection of your personal assets within an LLC is appealing, but first, you need to understand how an LLC works. Here are some of the features of an LLC:

  • There can be one or more owners of an LLC.
  • An LLC is created under state law.
  • The cost to create and maintain an LLC is much cheaper than a corporation.
  • All owners have limited liability for business debts.
  • The terms of limited liability may vary based on state laws.

An LLC is treated as a partnership during federal taxation, not as a separate taxpaying entity. In a situation where there is only one owner, the owner can report income on their personal tax returns–thus no need to file a separate tax return, which may, in turn, mean lower taxes. On the other hand, an LLC may choose to be taxed as a corporation if it has multiple members. This means the LLC would need to file a tax return separate from any personal tax returns.

When forming an LLC, having a party that understands and has experience with current laws is important to ensure all aspects are in order. States may require submitting an annual report. Make sure to follow the state requirements and abide by them at all stages to ensure your incorporation is not revoked.

Liability Protection

An LLC avoids personal liability in cases where the business is in debt or is involved in a legal issue that requires paying compensation to a victim. As a separate entity, the LLC is responsible for all debts and liabilities accrued by the business.

It’s also crucial to know how an LLC protects its owner(s).

Liability Protection Against The LLC’s Debt

When you form an LLC, any debts of that business cannot be associated with your personal possessions. Creditors can only go after the properties owned by the LLC or the business’s bank accounts.

However, there is a limit to this; under any circumstances where an owner personally commits wrongdoing with business loans, financial institutions will require that the owner is held personally liable. In that case, the owner is responsible for the debts if the LLC’s assets can’t fully cover them.

Liability Protection Against Actions By Employees or LLC Co-Owners

While running the business as an LLC, personnel are not held liable for any credit the business gets itself in. Even in a negligent or wrongdoing situation by an owner or employee, the LLC is deemed liable. For settlement in this situation, the LLC’s property or money can be used.

Furthermore, the employee or owner could be held personally liable for their actions, but the other owners would not be involved in the settlement.

Let’s say an employee is driving a company car while on a company business trip and hits a pedestrian. While driving, the employee was intoxicated. In this case, the company can be sued by the pedestrian’s family and held liable for the employee’s actions. The company’s possessions would be used for settlement along with the employee’s personal assets.

Personal Liability For Your Own Actions

Here is another example where the liability limit for an LLC kicks in. In all states, you will be held liable for any negligence committed while running your LLC. Owners will be held liable for any wrongdoings they personally commit. These actions include:

  • Failing to deposit taxes withheld from employees’ pay
  • Engaging in illegal or fraudulent activities while running the business that harms other people or the company
  • Treating the LLC as part of personal affairs instead of as a separate legal entity
  • Negligence during the course of business leading to a person getting injured

Don’t expect an LLC to always be a way to protect yourself the responsibility of your own negligence. Both the LLC and owner are considered liable, and the LLC and owner’s possessions can be seized by creditors during settlement if being sued.

For example, let’s assume the owners know that the driver is intoxicated when carrying out business activities. They ignored it. In addition to the employee’s negligence charges, owners can also be sued and deemed personally liable for negligence.

LLC’s Liability For Members’ Personal Debts

An LLC’s money or property cannot directly settle an owner’s personal debts. However, a creditor can use different techniques based on the state laws to collect a debt from an owner.

  1. Getting a changing order. This is a court order that requires the LLC to pay the creditor the money owed
  2. A court order requiring the LLC to dissolve. The LLC will sell its assets and dissolve.
  3. Foreclosing on the owner’s LLC ownership interest. The creditor permanently takes over member financial rights, including receiving more assets from the LLC.

All states do allow the creditors to get a changing order, but based on what each state law allows, other actions by creditors may be limited.

Final Thoughts

LLC protections have a limit to them, which is a good thing considering the things a business owner would be able to get away with if there were no restrictions. Even with these limits, forming an LLC is still the best way to get liability protection, especially for small business owners.

Note: An LLC is not the same as having your business insured. Check out this page for more information.