When planning to start up a new business, one of the first decisions you’ll need to make will be how you should register your company.
A vast majority of small business owners are keen to operate their new company with the freedom of a sole proprietorship — but worry about personal asset protection should their new startup run aground. That’s why one of our readers asked us about limited liability companies (LLCs) and the legal protections they can offer.
In most cases, these protections are extensive.
When you incorporate an LLC, you are creating a new legal entity that it completely separate from you and other company shareholders. Consequently, each LLC member enjoys what’s called limited liability. That means if the LLC ends up falling flat, gets sued or files for bankruptcy, the personal assets of each LLC member should be protected from getting seized in order to satisfy those company debts.
Personal Asset Protection
Personal bank accounts, homes or various other assets are typically protected. Likewise, the assets of an LLC cannot normally be used in order to satisfy the personal debts of an LLC member.
The only loss an LLC owner will likely face in the event of bankruptcy should be their capital contribution to the business. That being said, there are a couple of caveats. As with other incorporation types, an LLC owner may face some form of personal liability if they have personally guaranteed a particular company debt.
One way creditors can breach the wall between your company and your personal assets is called “piercing the corporate veil”. This usually happens when an LLC member has co-mingled their personal assets with company assets, committed fraud or failed to contribute sufficient assets to their company in the first place. The protection of your personal assets may also be rendered void if you have transferred personal property to your LLC in order to evade creditors. This practice is called “fraudulent conveyance”.
That being said, an LLC generally offers a fantastic level of personal asset protection – even if that company ends up buried in debt. So long as you tread carefully and keep your finances firmly separate from that of your company, you should be relatively safe.
LLC Photo via Shutterstock
Legal questions like this are hard, but starting with an LLC is a great place for most SMBs to get protection.