When forming a business in the United States you have a few options when it comes to structuring. Forming as a limited liability company (LLC) allows you to protect your personal assets by not being personally liable for the company's debts or liabilities. This asset protection is afforded by separating yourself from the LLC. Your LLC will become its own entity and is given the characteristics of a corporation, as well as those of a partnership or sole proprietorship.
When you form an LLC you are creating a new business entity. This is completely separate from that of its owners. This separation is what we call “limited liability protection”. Should your business be sued or not be able to pay its debts, the LLC can be sued, but not the members. This means that the LLC’s bank accounts are available to be seized in a lawsuit, but the personal assets of the members are not.
Despite this personal protection afforded in forming an LLC, forming an LLC will not protect you against personal liability when it comes to your own choices. This means that you need to establish another method of LLC asset protection. You should also know that you are always responsible for your own negligence, malpractice, or other personal wrongdoings. This is why it is essential to hold liability insurance.
One of the main reasons business owners form LLCs is because of the asset protection they get from doing so. Here are a few of the many ways an LLC protects your assets.
Having insurance is important for any business. By having insurance you are able to limit your liability if you personally make mistakes. For example, if you are negligent or make other mistakes in relation to your business. Your LLC may not protect you from all of the mistakes you make, but liability insurance should.
Because an LLC can elect taxation, you can choose to elect corporate status. This can provide you with other protections that would otherwise be seen as mistakes from the company. You will be taxed differently and have different roles.
When it comes to corporate law, shareholders cannot mix personal assets with corporate assets. This is because this will cause you to be held liable for any problems that arise, or any lawsuits that are placed upon the business. This can also occur when it comes to LLCs, which means no funds from the business mix personal assets with corporate assets are held liable for anything that may occur. This can also occur with LLCs. To avoid this, keeping LLC finances completely separate and as a separate entity is necessary. You need to ensure you have a separate bank account and credit card for your LLC at the very least. There should always be documents such as contracts and purchase orders in the name of the LLC.
When an LLC is sued anything that belongs to the LLC can be taken in the lawsuit. To ensure that your personal assets are safe, you typically would form an LLC. To minimize your risk further you can keep as little as possible within the company. Instead, keep only what you need to operate, and payout the rest to the owners, or trust if you prefer.
Credit is essential for personal use as well as for any company. You can sometimes become liable for company debts if you have personal guarantees for your company. This is why you need to establish credit for your business rather than using your own credit line. If you personally guarantee these lines of credit, you will be liable to pay them should the LLC be unable to.
There are a few limitations on some of the above methods. For instance, if you owe a creditor and then you move money out of the company, this can be considered fraud. This is because you are knowingly trying to avoid that money being taken. This is why you must keep at least enough money in the company in order to pay the expenses. In some cases, the court may hold you personally liable regardless of what happens. This can lead to a lawsuit and issues on your personal behalf.
The steps to form an LLC are simple. After choosing a name and a registered agent, you can file the articles of the organization. Then you can follow up by creating an operating agreement, obtaining an EIN, and purchasing liability insurance. Finally, you can begin operating in the state of formation.
Should you wish to ensure that you are in compliance with all laws and regulations, it is recommended to hire a lawyer. Hiring a lawyer can aid in the process and ensure that you maintain LLC asset protection and separation of liability between yourself and the LLC.