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Does an LLC Protect Your Personal Assets?

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Published on January 6, 2022

Updated on January 10, 2022

Does an LLC Protect Your Personal Assets?

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Does an LLC Protect Your Personal Assets?

A limited liability company (LLC) is one of the most popular business entity types for startup companies in part because of the liability protection it provides. When you form an LLC, you create an entity that is separate from you, the owner.

The LLC has its own assets, debts, and liability. The LLC provides personal liability protection, so your personal assets are protected against claims from creditors or lawsuits. 

To learn more about LLCs, read this Step By Step article.

What Is Limited Liability Protection?

The LLC is its own entity with assets and debts, so if the business is sued, the LLC is liable, while its owners are not. This means that the assets of the LLC, such as the business bank account, are at risk, but the personal assets of the owners, such as personal bank accounts, are not. Personal risk to owners is limited to the money they have invested in the business.

Exceptions to Limited Liability Protection

There are exceptions to an LLC’s liability protection, which is why it’s described as “limited”. If you, as the owner, get a business loan, the lender may ask you to personally guarantee the loan.

The personal guarantee is your legal promise to repay the loan personally if the LLC cannot pay the loan. A lender generally will require a personal guarantee if the LLC does not have a business credit history. They instead will rely on your personal credit and your personal guarantee to approve the loan. 

In this case, if you do not repay the loan, the lender can go after your personal assets. The liability protection provided by the LLC no longer applies. 

Liability protection also does not apply if the LLC owners:

  • Injure someone in the course of business 
  • Fail to pay payroll or other taxes
  • Do something fraudulent or illegal that causes harm
  • Commingle personal and business activities, also known as “piercing the corporate veil”

What Can I Do to Maximize My Personal Asset Protection?

There are ways to get the most out of your LLC’s liability protection. First, avoid piercing the corporate veil; don’t mix personal and business assets in any way and keep your business records and finances completely separate from your own. Keep all business bank accounts in the business name, as well as credit cards and loans.

All contracts, invoices, and other documents should be in the name of the LLC and signed on behalf of the LLC. You must establish and maintain the LLC as an entity that is financially separate from you as the owner.

Next, establish a credit history for your LLC so that you do not have to personally guarantee loans. You can do so by getting business credit cards in the LLC name and making payments on time.

Another way to increase your protection is to make sure you have liability insurance that will protect both you and the LLC. General liability insurance is the most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is the one to get. It even protects against bodily injury and property damage.

Finally, you can protect your investment in the business by limiting the amount of money you keep in the company. Keep in mind, you need to keep enough in it to pay the LLC’s expenses, and you can’t take money out of the LLC to avoid paying a creditor. This would be fraud.

General Protection of Your Personal Assets

You may be able to protect your personal assets from not only business-related claims but other types of claims as well, by putting them in a trust. You should speak with your attorney to find out if a trust is a good option for you, and discuss how to further protect your personal assets. Generally, you can put all your assets into the trust, including your home.

In Closing

Many business owners choose to form an LLC specifically for the liability protection it offers. By taking the steps described in this article you can ensure that you get the most out of that protection. It’s recommended that you speak with an attorney when forming your LLC to understand what it offers and how you can maximize your personal asset protection.

You can read more about the benefits of forming an LLC in this Step By Step article. Forming an LLC is a simple process laid out in this Step By Step article on starting an LLC