Setting up a limited liability company (LLC) for your business can offer you protection from being personally liable for business debts. Business creditors could generally not make claims against your personal assets to satisfy obligations taken on by the LLC. This is based on the premise that the LLC is a legal entity separate from its individual owner or owners. Therefore, in order to maintain protection against personal liability, certain formalities and requirements need to be met in operating the LLC.
As pointed out in Nolo, there are situations in which you could be personally liable for obligations of the LLC. If you personally guarantee a business loan or debt, which would commonly be required especially when you are just starting up, you would be personally liable for the debt. Fraudulent, illegal or reckless acts, and any harm or injury caused directly to someone else could leave you personally liable for damages. If your business has employees and you fail to deposit taxes withheld from their wages, you could be personally liable.
If you mix business and personal affairs, it could be determined that you are actually conducting business as an individual or individuals. If a business creditor makes a claim, a court could determine that you are personally liable. As pointed out by Greg Yaghmai of Rutledge & Yaghmai, Attorneys at Law, this is called "piercing the corporate veil." A litigator of a business creditor's claim may look for lack of documentation of minutes of meetings, even for a single-member LLC. Another indication that the LLC is not being treated as a separate entity is if you use money from the LLC for personal finances.
In addition to making personal guarantees, co-mingling funds, and not completing corporate formalities, Richard Chapo of the San Diego Business Law Firm adds that you could be held liable if you are personally representing the business. You could be considered to be acting personally if you sign leases and contracts and receive payments in your own name rather than in the name of the LLC. And Chapo points out that an LLC would not protect you from criminal charges.
David Staub, on the Limited Liability Company Center website, offers recommendations for maintaining protection of your personal assets from claims against the LLC. These recommendations include preparing an operating agreement, even for a single-member LLC, and keeping official records of meetings and approvals of acts and major transactions carried out by the LLC. Staub recommends setting up a separate bank account and using that account for all payments and deposits by the LLC.
Other recommendations relate to handling the LLC's business, such as ensuring there is sufficient capital and not taking on commitments that the LLC will be unable to pay. And while the LLC itself can protect you from personal liability, you still need insurance to adequately cover your business assets and to cover potential claims for injuries or damage to third parties.
As pointed out in Nolo, there are situations in which you could be personally liable for obligations of the LLC. If you personally guarantee a business loan or debt, which would commonly be required especially when you are just starting up, you would be personally liable for the debt. Fraudulent, illegal or reckless acts, and any harm or injury caused directly to someone else could leave you personally liable for damages. If your business has employees and you fail to deposit taxes withheld from their wages, you could be personally liable.
If you mix business and personal affairs, it could be determined that you are actually conducting business as an individual or individuals. If a business creditor makes a claim, a court could determine that you are personally liable. As pointed out by Greg Yaghmai of Rutledge & Yaghmai, Attorneys at Law, this is called "piercing the corporate veil." A litigator of a business creditor's claim may look for lack of documentation of minutes of meetings, even for a single-member LLC. Another indication that the LLC is not being treated as a separate entity is if you use money from the LLC for personal finances.
In addition to making personal guarantees, co-mingling funds, and not completing corporate formalities, Richard Chapo of the San Diego Business Law Firm adds that you could be held liable if you are personally representing the business. You could be considered to be acting personally if you sign leases and contracts and receive payments in your own name rather than in the name of the LLC. And Chapo points out that an LLC would not protect you from criminal charges.
David Staub, on the Limited Liability Company Center website, offers recommendations for maintaining protection of your personal assets from claims against the LLC. These recommendations include preparing an operating agreement, even for a single-member LLC, and keeping official records of meetings and approvals of acts and major transactions carried out by the LLC. Staub recommends setting up a separate bank account and using that account for all payments and deposits by the LLC.
Other recommendations relate to handling the LLC's business, such as ensuring there is sufficient capital and not taking on commitments that the LLC will be unable to pay. And while the LLC itself can protect you from personal liability, you still need insurance to adequately cover your business assets and to cover potential claims for injuries or damage to third parties.
