Maintaining Limited Liability with a LLC
One of the primary benefits of creating a limited liability company (LLC) is the protection it offers the owners from being personally liable for debts of the entity. Additionally, setting up a LLC is much easier than running a corporation. Below are a few of the main features of a LLC:
Limited Personal Liability
The owners of a LLC are protected from incurring personal liability for debts of the business. In other words, if the entity cannot pay its vendors, landlord or other creditors, they cannot sue the LLC’s members or go after their home or other assets. The creditors of the LLC can only pursue LLC assets to satisfy the debts, so the LLC owners only stand to lose the money they invested in the LLC. This is why the owners of a LLC have “limited liability.”
Exceptions to Limited Liability
It is important to understand that the limited liability afforded by a LLC is not absolute. There are certain exceptions to limited liability for LLCs and corporations. The owner of a LLC can incur personal liability if her or she;
- personally or directly causes injury to someone
- executes a personal guarantee on a loan or business debt which the LLC defaults on
- does not deposit the taxes withheld from the LLC’s employee’s paychecks
- takes an intentional action that is fraudulent, illegal or reckless that results in damage to the LLC
- fails to treat the LLC as a separate legal entity or co-mingles personal finances with LLC finances
This last exception, sometimes called ‘piercing the corporate veil,’ is the most common way LLC owners get themselves into trouble. If an owner uses the entity merely as an extension of his or her own personal finances, the court may rule that the LLC doesn’t really exist and the owners should be personally liable for their actions. To ensure this doesn’t happen to you, consider the following:
- Never conceal or misrepresent facts, act legally, and be honest about your finances.
- Be sure to put enough money into the LLC so that it can pay its expenses.
- Always treat the LLC like a separate legal entity. Obtain a federal employer identification number, pay business debts out of the LLC’s checking account, and never allow your personal finances to co-mingle with the LLC’s finances.
- Create a formal written operating agreement to govern the LLC. It lends credibility to your LLC as a separate entity.
If you are starting a new business, let us help you comply with all the various applicable laws, regulations and rules. The attorneys at Nielsen Law Group can help with all business formation matters. You can schedule your initial consultation by calling (480) 888-7111 or submitting a web request here.