How Exactly Does an LLC Protect its Owners?

 

The most common question I get from new business owners is "How Exactly Does an LLC Protect Me?" 

The LLC is its own legal person separate and apart from its owners. So, when you create an LLC for your business, the LLC itself is the business.  You are not the business.  You are the person who owns the business.

The LLC is the actual person who customers do business with. The LLC is the person who enter into all of the business contracts. When you the business is ready to hire employees, it is the LLC who is the employer.

You are not the business. You are simply the owner of the LLC. So, when a customer, supplier, employee or any third party has a problem with your business, that person must deal with the LLC. If that person ever decides to sue the business, it must sue the LLC.

The LLC laws of every state specifically protect owners of an LLC from the LLC debts, obligations and liabilities. The laws generally state that a member (owner) of an LLC is not liable for the obligations of the LLC solely be reason of being a member.

This is the same protection afforded by corporations. The benefit of an LLC over a corporation is that LLCs allow business owners a lot more flexibility and simplicity than corporations.

If you did not use an LLC and ran your business as a sole proprietorship, then you would be personally liable for all business obligations.

If you are personally liable, then you are subjecting everything you own to unnecessary risk.  If someone were to sue you and win in court, the court can take your assets (home, savings, cars, jewelry, investments) to pay off the judgment against you.
 

On the other hand, if you ran your business properly though an LLC, all lawsuit judgments would be against the LLC not your personally.  So, your personal assets will be protected from being taken to satisfy those judgments.

 

There are Exceptions to Limited Liability Protection

Now, most commentary on LLC liability would end here, but I have been representing LLCs and business owners long enough to know that this next section is important and relevant.

There are several exceptions to the rule that members (owners) are not personally liable for LLC debts and obligations.  Here is a summary of the major ones.

First Exception, any person is always liable for their own personal conduct when that conduct injures someone or something. So, if you were in a company car going to a business meeting for your LLC and you were negligent and hit another driver, you would still be personally liable for the injuries and damages. LLCs do not shield you from being liable for your own personal negligence.

Second Exception, when you first start your LLC business, many third parties are not willing to do business with just your LLC. Your LLC is brand new and probably does not have a lot of assets.

So, some people might ask the LLC owners to "personally guarantee" the obligations of the LLC. The most common situations are borrowing money and getting office space.

A bank is going to require that you personally guarantee any loans taken out by the LLC (at least until the LLC has been around for awhile and built up some assets of its own). Similarly, if your LLC needs office space, the landlord will usually require that the LLC owner personally sign the lease agreeing to be liable.

So, if you personally agree to be liable for an LLC obligation by signing an agreement stating so, you will be liable for those specific obligations.

Third Exception- Another big exception is known as the piercing the LLC veil problem. Many people form an LLC for their business and then operate their business as if the LLC did not exist. It is very important that you run the business through the LLC and maintain certain LLC documentation.

After all, if the owners of the LLC ignore the LLC and run the business as a sole proprietorship, then why should third parties suing the LLC not be able to sue the owners?

Our eBook, The Six Step LLC Formula for Limited Liability Protection, that comes with our LLC formation services, provides the necessary steps and requirements for you to ensure you use your LLC in the right way to avoid the piercing the LLC veil challenge.
 

I hope this gives you helpful information about how an LLC provides a layer of protection between the business and its owners.

Because of this great benefit, it is universally agreed by lawyers and accountants that businesses should always operate using a limited liability entity such as an LLC. The costs are so low given the tremendous benefits!
 

Many think that lawsuits will not happen to them.  But the statistics prove otherwise.  Small business owners are prime targets for lawsuits including frivolous lawsuits!  The predatory litigation attorneys are out there. 

 

Don't become one of my clients who come into my office in shock with lawsuit papers in hand after having not planned properly to protect yourself in your business.

Click here to learn more about our LLC Formation Services (100% Satisfaction Guarantee)

 

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