How to Protect Your Assets as an LLC Owner

Many entrepreneurs form a limited liability company (LLC) for their new business because of its many benefits, such as liability protection. An LLC is a separate entity from its owners or members and thus has its assets and debts.

If the LLC is sued or cannot meet its financial obligations, only the assets of the LLC are at risk, not the personal assets of the members. However, some exceptions apply to this rule – and as an LLC owner, it’s important to be aware of them.  

Read on to learn how you can protect your assets.

Personal Liability Protection Exceptions

The word “limited” is part of the LLC label for a very good reason: there are exceptions to the liability protection the business entity provides. The most common exception is when an LLC member personally guarantees business financing, such as a bank loan.

Startup LLCs often fail to qualify for financing on their own, which prompts one of its owners to step up and provide personal financial backing for the loan. In these cases, if the LLC defaults, the LLC member who provided the guarantee is liable for those loan repayments.

If you cannot pay, your assets, including your home, could be at risk. Other situations in which liability protection does not apply include:

• A member injures someone in the course of business 
• Members fail to pay payroll taxes or other taxes
• Members do something fraudulent or illegal that causes harm to an individual or company
• Members commingle personal and business activities, i.e., “pierce the corporate veil.”

How to Further Protect Your Assets

There are several steps you can take to keep your assets safe. We explore those steps further below. 

1. Build Business Credit

Establishing business credit will increase your LLC’s chances of being approved for financing, eliminating the need for any personal guarantee. You can build business credit by obtaining a business credit card and paying it off monthly. Just be sure to pay all your vendors on time. 

2. Don’t Personally Sign Contracts

The LLC, not you personally, should sign contracts with vendors and customers. This helps further establish your LLC as its entity. 

3. Don’t Pierce the Corporate Veil

Be sure to separate business and personal finances. All business funds, credit accounts, and financial records should be separate from your funds and records. 

4. General Liability Insurance

General liability insurance helps protect the LLC and its members from liability, even in the case of injuries. 

5. Limit LLC Assets

Limit the amount of funds in your business bank account by making regular distributions to members. The fewer assets the LLC owns, the lower the risk. 

6. Trusts 

You and other members should consider putting your assets, even your homes, into trusts. Trusts provide robust legal protection for assets. Speak to an attorney to determine if a trust is right for you.

In Closing

Your assets are generally protected from the business’s financial obligations with an LLC. But you can never be too careful about important assets like your home, so it’s a good idea to take some simple steps to decrease your risk significantly. 

Please discuss your asset protection strategy with your attorney to ensure you do everything possible to keep your assets safe.