Have You Personally Exposed Yourself to Liability?
There are many myths behind LLC’s, especially those maintained by business owners believing they cannot be personally liable for wrongs committed by them or the company. Even with an LLC designation business owners need to make sure they do not commit some of the common mistakes many others have made and commit to protecting yourself and the company you have invested so much into.
In recent years the LLC business model has universally become the go to choice for business owners due to the flexibility and personal asset protection afforded; however, with everything these attractions do have limitations and why you should always consult with an attorney prior to forming your legal business entity. Understanding these limitations as well as the benefits and risks of an LLC in advance can assure you are making the correct decision in choosing an LLC over any other form of business entity. This article will go over some of the more common liabilities you can expose and protect yourself from as a single member or multi-member LLC as well as the limits of those protections.
How LLC Protection Actually Works
In actual practice, an LLC designation will generally protect an owner or member from personal liability when the owner has not committed an intentional wrong and has sufficiently funded the LLC, confirming this has been done properly is one of the primary reasons you should seek out legal counsel in advance. Generally, an LLC designation will protect the owner from having personal bank accounts, vehicles, properties, or separate wages from being exposed and affected by a lawsuit’s outcome.
Under What Circumstances Does an LLC Owner Have Personal Liability ?
The most common circumstances when an LLC owner will have personal liability is when the LLC owner commits civil theft or violates trust fund protections. Under these circumstances, a court is likely to “pierce the corporate veil” of an LLC. This is a legal phrase which simply means that the court has made sufficient factual and legal determinations to disregard the LLC designation as a separate entity and that the wrongs committed were done by the individual, the LLC owner.
These form of claims are difficult and courts are historically hesitant to issue these types of findings due to the sincere consequences. However, an LLC found to have engaged in the following actions will make personal liability unavoidable and in some circumstances non-dischargeable in bankruptcy, meaning it will stick with you individually.
Failing to Maintain Separation Between Business & Personal Assets
A large and very common factor in piercing the corporate veil is when the LLC owner comingles personal assets with business assets, this can lead to significant problems. Comingling will generally lead to a determination that the LLC is nothing more than an extension of the member’s personal life and not in fact a separate entity.
Civil Theft or Trust Fund Violations
Civil theft and trust fund violations are the most common instances that a Court will likely pierce the corporate veil and hold the LLC owner personally liable. The most common example seen in actual practice is the circumstance in which the business owner receives money from a client which is to be used for a specific purpose or project, and the owner uses it for a separate project (e.g. robbing Peter to pay Paul) and the client is left with less or without any project funds. The statutory penalties for these forms of wrongs being committed by LLC owners or members are strict and heavy handed.
Illegal Endeavors
For obvious reasons, a court will not uphold a businesses’ LLC protections if the LLC has been used to solely shelter an illegal enterprise.
Protect Your Business, Investment, and Yourself From Personal Liability
We see too many business owners not investing the time and resources into doing things correctly and thereby overestimating the (limited) power of an LLC designation. You and your business are the only ones that will suffer the consequences, likely both professionally and personally.
Some of the simple steps you can take to protect your business and insulate yourself from LLC misuse:
- Make sure your company is treated as a distinct entity
- Have an operating agreement in place and regularly revised
- Use separate bank accounts for your business funds and personal finances
- Maintain accurate business records
- Contact a business attorney with knowledge of how to protect you from making these mistakes
All circumstances noted herein apply irrespective if you are a multi-member or single member LLC, for those reasons it is critically important for you to at a minimum follow the listed steps above to protect your business and yourself from unnecessary personal liability. You invested the time and resources into building your business, so treat it like the business it is and protect your investment.