A Limited Liability Company (LLC) is typically the best combination of sole proprietorships, corporations, and partnerships into one business entity. It offers a flexible management structure, owners’ liability protection, and various tax benefits. Regarding liability protection, an LLC protects your personal assets from any legal issues and actions arising from the business.

That means that your personal assets remain protected even if the LLC is found guilty of wrongdoing or negligence because of the co-owners or employees’ actions. However, you can be held liable for defaulting on personal debts or for misconduct despite being an LLC owner. Oklahoma City bankruptcy lawyers can help you understand your options when faced with personal and business debt.

How Does an LLC’s Limited Liability Protection Work?

Upon forming an LLC, you establish a new business entity legally separate from you and the other owners. That separation is legally known as limited liability protection. If the LLC can’t pay off its debts, its creditors can go after the entity’s accounts and other assets.

Assets in your name like homes, cars, and bank accounts remain untouched. That means the only money at risk is the amount you have invested in the business. But, as with most things, there are exceptions. For example, the owners are still liable for debts they have personally guaranteed and unpaid payroll taxes. An Oklahoma City debt settlement attorney can help you guide you on how to handle your business debts separately from personal liabilities.

How Can I Protect My Personal Assets as an LLC Owner?

You can get the most out of LLC liability protection despite its limitations. Some strategies you can use to maximize this valuable feature of LLCs include the following:

Get Limited Liability Company Insurance

If someone accuses you of wrongdoing and files a lawsuit, your LLC ownership won’t protect you from personal liability. That goes for wrecking the company car, negligence in maintaining your premises, or defrauding a customer.

If the lawsuit involves personal injury, the consequences can be financially devastating. Having a good liability insurance policy goes a long way in covering you and the business if you face such charges.

Establish a Line of LLC Credit

Personal guarantees are a significant reason small business owners become liable for business-related obligations. If you guarantee a lease or loan for the business, you agree to make the repayments if the LLC can’t. Depending on the amount in question, you may be required to pledge your home or another enormous asset as collateral for the credit facility. A debt settlement attorney in Oklahoma City can guide you on settling an outstanding debt you guaranteed with your personal property.

If the LLC is still new, the likelihood is high that you’ll personally have to guarantee large transactions. However, you can avoid being a guarantor for business loans in the future by establishing a line of credit in the LLC’s name. It would be best if you also worked on showing a track record of revenue and profit while paying your bills on time.

Treat Your LLC as an Independent Entity

Corporate law stipulates that shareholders who mix corporate assets with personal ones can be held personally liable for the entity. Some indicators show that some courts may also extend the liability to the LLC owners, a factor known as alter ego liability.

Ensure you keep the LLC records and finances separate from the owner’s personal finances. Keep the company’s bank account and credit cards separate. It’s equally important that all invoices, contracts, purchase orders, and other business documents have the LLC name and are signed on behalf of the LLC. Doing so makes everyone conducting business with the LLC aware that they’re dealing with a legally-recognized entity and not you as an individual.

Avoid Keeping Excess Money in the Company

The money you have in your LLC can go towards satisfying a creditor if anyone sues the LLC, but your assets will remain unaffected. You can limit your vulnerability by keeping as little money as possible in the company’s accounts. Ensure the rest goes to the rightful owners like creditors at the right time.

Nonetheless, there’s a limitation to this strategy. The transaction will be considered fraudulent if you already owe a creditor and transfer money from the company. Secondly, the court will hold you liable based on “alter ego.” The mistake, in this case, is undercapitalizing the business to defraud your creditors.

Take Steps to Minimize Liability Risk

When handling documents relating to the LLC, always certify that:

  • You act in the LLC’s name when signing contracts or financial agreements. You should be the LLC’s agent at all times, ensuring you identify the entity as the principal in the document
  • The LLC’s other agents and employees act as representatives of the corporation, not you personally
  • You carefully review all loan documents and carefully understand the potential consequences of covenant violations. Various loan defaults can lead to personal liability

For added protection, you can consider adding a personal umbrella policy to the corporation’s traditional business insurance coverage.

When Will an LLC Not Protect My Assets?

Despite the above strategies, remember there are exceptions to LLC liability protection. Examples include:

  • Failing to comply with state laws, such as filing annual reports on time
  • Personal injury to someone due to service provided by your business, such as a driver
  • Personal misrepresentation like lying on credit or loan applications for the business
  • Using personal credit card to make purchases for the business, you have a responsibility to ensure you make the payments, not the LLC.
  • Signing your name and title such as CEO of the LLC, making the business liable for the debt payment

If you need more guidance on protecting your personal assets in these circumstances, a debt settlement attorney in OKC can provide legal counsel.

Explore Your Strategies to Protect Your Personal Assets from Creditors

Making decisions regarding your LLC creditors and liabilities can be complex if you don’t know how to separate business debts from personal ones. It’s always wise to hire bankruptcy and debt settlement lawyers in Oklahoma City to provide sound advice regardless of the type of liability in question.

Our firm hosts experienced debt settlement attorneys to advise you on all you need to know about personal asset protection. If you have questions or need clarification about LLC formation and owner liability protection, we are here to help. Contact our firm to schedule a FREE case assessment.