Part
One
A
limited liability company
(LLC) is an ownership
organization similar
to a corporation. It
combines attributes
of both corporations
and partnerships (or,
for one-person LLCs,
sole proprietorships).
An LLC offers the corporation's
protection from personal
liability for business
debts and the pass-through
tax structure of partnerships
and sole proprietorships.
Although more work
is required to set
up an LLC than a partnership
or sole proprietorship,
running and LLC is
much easier than running
a corporation. If you
have concerns about
being held personally
liable for debts of
your business, then
it would probably be
a good idea to have
an LLC.
Here
are the main features
of an LLC:
Limited
Personal Liability
Like
shareholders of a corporation,
all LLC owners are
protected from personal
liability for business
debts and claims. This
means that if the business
itself can't pay a
creditor, such as a
supplier, a lender,
or a landlord, the
creditor cannot legally
come after the house,
car, or other personal
possessions owned by
any of the LLC members.
Since only LLC assets
are used to pay off
business debts, LLC
owners stand to lose
only the money they've
invested in the LLC.
This feature is also
known as "limited liability."
The
exceptions to Limited
Liability
While
LLC owners enjoy limited
personal liability
for most of their business
transactions, it is
important to realize
that this protection
is not absolute. This
drawback is not unique
to LLCs because the
same exceptions also
apply to corporations.
An LLC owner can be
held personally liable
if he:
*
personally and directly
injures someone
* personally guarantees a bank loan or a business debt on which the LLC defaults
* fails to deposit taxes that are withheld from employees' wages
* intentionally does something fraudulent, illegal, or clearly wrong-headed
thereby causing harm to the company or to someone else, or
* treats the LLC as an extension of his personal affairs, rather than as a
separate legal entity.
The
last exception is the
most important of all.
In some cases, a court
might say that the
LLC doesn't really
exist and finds that
its owners are really
doing business as individuals
who are personally
liable for their acts.
To prevent this, make
sure you and your co-owners:
Act
fairly and legally.
Never conceal or misrepresent
material facts or the
state of your finances
to vendors, creditors,
or other outsiders.
Fund
your LLC adequately.
Invest enough cash
into the business so
that your LLC can meet
predictable expenses
and liabilities.
Keep
LLC and personal business
separate. Get a federal
employer identification
number, open up a business-only
checking account, and
keep your personal
finances out of your
LLC accounting books.
Create
an operating agreement.
Having a formal written
operating agreement
lends credibility to
your LLC's separate
existence.
Business
Insurance
A
good liability insurance
policy shields your
personal assets when
limited liability protection
does not. For example,
if you are a masseuse
and you accidentally
injure a client's back,
you should be covered
by your liability insurance
policy. Insurance can
also protect your personal
assets if your limited
liability status is
ignored by a court.
In
addition to protecting
your personal assets
in these situations,
insurance can also
protect your corporate
assets from lawsuits
and claims. However,
you should be aware
that commercial insurance
in most cases does
not protect personal
or corporate assets
from unpaid business
debts, whether or not
they're personally
guaranteed.
If
you would like more
information regarding
asset protection, trusts,
family limited partnerships
or the subject of this
article please call
or email our office.
