The purpose of limited liability companies, or LLCs, is to protect the personal assets of the business owner from liability. An LLC can limit the liability of the business from certain types of legal claims, as well. Limited Liability Companies and asset protection go hand in hand. These protections are only available, however, when the legal entities are created properly.
What type of liability can an LLC protect against?
The basic premise behind creating an LLC is to allow the business owners to avoid any personal liability for a business debt. Essentially, you are keeping personal assets separate from business assets. Only the company can be held liable for debts the business incurs. In other words, forming an LLC will protect against personal liability for your company’s debts and for business-related actions by co-owners or employees. An LLC will also protect against any liability for the personal debts of other members of the company.
Preventing personal liability for business debts
Simply operating your business as an LLC does not automatically protect you from liability. You must also refrain from personally guaranteeing your business debts. As long as you follow this rule, your business creditors can only go after business-owned property. This is one of the main benefits of operating as an LLC.
Avoiding personal liability for the wrongdoing of others
Protecting yourself from the wrongdoing of employees or co-owners of your business is also important. With an LLC, you are personally protected, even if their conduct occurred during the course of business. That means, if the LLC is liable for the negligence or wrongdoing of an employee or co-owner, only the assets of the LLC are subject to the judgment. Remember, the owner or employee who was responsible for the wrongdoing may still be held personally liable.
Personal liability for your own actions
You cannot hide behind your LLC if you were personally negligent or engaged in any wrongful conduct related to your business. You are personally responsible for your actions despite the fact that you operate an LLC. For instance, if you are negligent and cause someone to be injured, during the course of your business, you can still be held personally liable. The same is true if you commit some fraudulent or illegal act, during the course of your business.
Why liability insurance is crucial
Never assume that an LLC will protect you against all personal liability. If both you and your business are found liable for some wrongful act you committed, both your personal assets and your business assets will be at risk. Therefore, having liability insurance is very important.
The full extent of liability or asset protection your LLC can provide depends on the laws in the state where your business is located. So, before you choose which business structure is right for your business, it is important to determine how much protection an LLC can provide to you and your business.
If you have questions regarding LLCs, or any other business planning issues, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.