Entrepreneurs often opt to start Limited Liability Companies for the many advantages they offer in terms of privacy, taxation, and asset protection. States like Wyoming and Delaware even have more LLCs than inhabitants. Why is this company structure so popular? Does it offer any special protection to its founders? Let’s see how an LLC can protect you while doing business in the US.
But first, let’s start with the basics.
What’s a liability?
Liabilities, either personal or corporate, are all the debts and financial obligations an entity has to honor to sustain itself. These responsibilities include:
- Bank account fees
- Loan payments
- Service payables
- Equity liquidation from partners
What’s liability protection?
Liability protection is the partial legal separation of a business from its owners. Most company structures grant liability protection to their proprietors, members, partners, or shareholders.
This legal separation accords that in most cases, a person’s assets will not be seized in favor of their company’s liabilities.
How does an LLC protect you from personal liability?
In case an LLC is not able to pay its accrued debt or make its due payments, creditors might go after its bank account balance and collect what’s owed. In further and more extreme cases, other company properties could be seized to satisfy said liabilities. Nevertheless, as an LLC member, your personal assets (cars, houses, personal bank account) can remain protected from being used to pay the liability.
In most cases, personal asset protection is still granted even if the liabilities cannot be fully satisfied with the company’s assets. Although, LLC members can be held accountable for individually-acquired debts, unpaid taxes, and liabilities accrued from any personal wrongdoing.
So in case, there’s a decline in your business’s profits or for some other legitimate reason, you cannot meet your obligations, rest assured that most likely your personal assets will not be seized.
When does an LLC not protect you?
There are 3 major ways in which your personal assets can in fact be seized to satisfy corporate liabilities. Take note of these instances before starting your own LLC.
- Personal assets as a guarantee (not recommended). When you put up your own personal property as a guarantee or collateral for a loan for the LLC (e.g. getting a mortgage to fund your business).
- Proven wrongdoing or fraud (also known as piercing the corporate veil, very rare). When a court rules that your personal wrongdoing caused either the liability or the payment failure.
- Breach of duties. When you incur corrupt or reckless behavior while managing the business for personal gains.
How to enhance liability protection?
The Operating Agreement is the internal document that controls the LLC. It doesn’t need to be registered or submitted to the state. Though make sure to draft yours and establish your LLC’s voting rights, profit allocation customs, role responsibilities, and members’ limited liability protections. This way there’d be fewer chances of personal liability occurrence from corporate claims.
Establish a business credit line
Avoid taking out personal loans to fund your LLC’s operations. Seek to open a credit line for the company with a financial institution so only corporate assets can be seized in case of payment failure.
Irrevocable trust (not recommended)
Grant ownership of sensitive personal assets like real estate and cars to your close family members. You won’t be able to sell, transfer or use as collateral for loans said properties anymore but on the other hand, creditors will not be able to collect them.
- Benefit: gain protection from creditor claims.
- Downside: you lose control of your assets.
More on how an LLC can protect you
Limited Liability Companies are one of the most popular business structures in the United States. Creating a safe business environment to protect your savings is not as difficult as it might seem. You can open an LLC with Globalfy from anywhere in the world and improve your assets’ security while doing business in the world’s biggest market.
Get all the benefits of the American economic system from your home country, 100% online. All you have to do is fill out Globalfy’s online business registration form and we take it from there. Start your own LLC from anywhere in the world.