Does an LLC Protect Your Personal Assets?

Setting up a business as a limited liability company (LLC) can protect the business owner’s personal assets from being claimed by business creditors. An LLC creates a shield between business liabilities and personal assets. This means, in most cases, a lender can’t force the owner to repay a loan taken out by the business. Nor can someone awarded damages in a lawsuit against the business require the owner to make good on it. The protection isn’t perfect, and business owners may want to take other steps to protect personal assets from business liabilities. A financial advisor can discuss ways you can protect your personal and business assets.

LLC Personal Asset Protection

A business owner set up as a sole proprietorship is personally liable for any business debts. However, other business structures, including LLCs and corporations, separate the owner’s and business’s liabilities and assets. As a result, an LLC owner’s personal assets generally can’t be claimed to satisfy a judgment against the business resulting from a lawsuit or unpaid debt.

If a creditor successfully sues an LLC, the creditor may claim assets of the business and sell them to collect a judgment. However, the assets of an LLC owner, including bank accounts and personal property, are usually shielded from claims against the business.

Because of this asset protection feature, an LLC is an important part of an asset protection plan for many business owners. The plan also often includes insurance and may use other tools, such as asset protection trusts.

LLC Protection Limits

Does an LLC Protect Your Personal Assets?

While forming a Limited Liability Company (LLC) is a popular choice for protecting personal assets, it’s important to understand the limitations of this protection. An LLC creates a legal distinction between the business and its owners, shielding personal assets such as a home, savings, or other personal property from business liabilities in most circumstances. However, there are situations where this protection might not hold up.

Personal guarantees: Many lenders and landlords require personal guarantees when extending credit or leasing property to an LLC. If you’ve signed a personal guarantee, you become personally responsible for the debt, regardless of the LLC’s structure.
Piercing the corporate veil: Courts can “pierce the corporate veil” in cases where the LLC is not properly managed or is used to commit fraud. This means the court may hold the LLC owner personally liable if: The LLC is used as a personal bank account, legal and financial formalities (like keeping separate accounts or proper record-keeping) are ignored or fraudulent or unethical actions occur under the LLC.
Professional misconduct: For individuals in professions like law, medicine, or accounting, an LLC does not protect against claims of professional negligence or malpractice. Personal liability insurance is typically required for these scenarios.
Intentional acts: LLC protection does not shield owners from personal liability for illegal, reckless, or intentional acts. For example, if an owner knowingly violates laws or causes harm, personal assets can still be at risk.
Co-mingling funds: Failing to keep business and personal finances separate undermines the legal separation of the LLC. This can result in a court ruling that the LLC is not a distinct entity, exposing personal assets.
Unpaid employment taxes: The IRS holds LLC owners personally liable for certain unpaid taxes, such as payroll taxes. Even if the business fails, the responsibility for these taxes does not disappear.

While an LLC provides a valuable layer of protection, it is not an impenetrable shield. Business owners must operate their LLC in compliance with legal and financial standards and understand the scenarios where personal liability may still apply. Pairing an LLC with robust insurance and sound business practices is the best way to safeguard personal assets.

Improving LLC Asset Protections

Owners who want more protection than an LLC provides have several options. To begin, an owner can avoid doing anything that could let creditors pierce the veil. These include making personal guarantees and signing loan papers without identifying themselves as a representative of the business. Giving the LLC a credit history by establishing bank accounts and taking out loans in the business name can make it easier for a new business to get a loan without a personal guarantee from the owner.

Insurance is another part of strengthening protections. A general liability policy covering an LLC can be paid out in the event of a negative judgment in a court case, so the owner doesn’t have to.

It’s also important to keep good records showing there is no commingling of personal and business funds. This means setting up and using business accounts to pay business expenses and avoiding putting business funds into personal accounts.

Owners may want to avoid leaving too much money in the LLC. Taking funds out of the LLC through distribution to the owner puts those funds beyond the reach of most creditors. However, if the owner takes out so much that the LLC can’t fulfill its obligations, a court may hold the owner personally liable.

An asset protection trust is another way to shield personal assets from business liabilities. These have to be set up well in advance of need and might be irrevocable, meaning assets placed in them can’t be taken back out. As a last resort, filing for bankruptcy can further protect personal assets from business losses.

Bottom Line

An LLC protects the owner’s non-business assets from most claims against the business. Commingling funds, personally guaranteeing loans and failing to keep good records are common ways owners unintentionally make themselves liable for business debts. Avoiding these missteps, as well as using other asset protection tools such as insurance and trusts, can provide generally reliable protection against business liabilities for many LLC owners.

Tips for Protecting Assets

Consider talking to a financial advisor about an asset protection plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Just as an LLC can protect personal assets from business liabilities, an estate plan can ensure that your assets are distributed under your wishes after your death. Having a valid will, enabling powers of attorney, setting up a trust, making gifts and contributing to charity can all help your estate minimize taxes and support the causes and people you want to support.