The Asset Protection of a Limited Liability Company

By Heather Frances J.D.

A limited liability company is a form of business ownership permitted by the laws of all the states. While an LLC provides the tax flexibility of a sole proprietorship or partnership, unlike those business types, LLCs offer asset protection by keeping the assets and debts of the company separate from the personal assets of the owners.

A limited liability company is a form of business ownership permitted by the laws of all the states. While an LLC provides the tax flexibility of a sole proprietorship or partnership, unlike those business types, LLCs offer asset protection by keeping the assets and debts of the company separate from the personal assets of the owners.

LLCs Are Separate Legal Entities

When a business's owners create an LLC, they form a separate legal entity as if the business were an independent person, legally speaking. The LLC establishes a barrier in which the assets of the business are kept separate from the assets of the owners, called members. This members own a share of the business, but they do not personally own any of the business's assets. For example, a business vehicle would be titled in the name of the LLC rather than in the name of one of the business's owners.

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Liability Protection

This separation of legal status protects the business owners' assets against debts and lawsuits because the members are not personally liable for business debts. The most a member can lose is the money or capital he contributed to the business. For example, if the business has $100,000 in assets and someone sues it, that plaintiff can only recover a maximum of $100,000 from the business because that is all the business has. The plaintiff generally cannot get the personal assets of the LLC's owners unless the owners were personally involved in the cause of the lawsuit.

Forming an LLC

Although each state has its own process for forming an LLC, states generally require a business to file articles of organization with the state's business registration office. In some states, certain businesses are not allowed to become LLCs such as banks, insurance companies and lawyers offices. The articles describe the basic features of the business, including the business name, address and registered agent. The business's name typically must include a reference to its status as an LLC. At the time of organization, the members can elect to manage the LLC themselves, thereby creating a member-managed LLC, or decide to have a manager handle the business, creating a manager-managed LLC.

Keeping It Separate

An LLC offers protection as long as it is treated like a separate legal entity; however, members who blur the line between personal and business assets may find themselves liable for the business's debts even though the business was organized as an LLC. For example, if the LLC's members intermingle personal funds with business funds and otherwise treat the business assets as their personal assets, a court could decide the LLC's structure is a sham, making the members personally liable for business debts.

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References

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What Is the Difference in an LLC & Owner/Proprietor?

Limited liability companies, or LLCs, and sole proprietorships are two different forms of business. For a new owner starting a business, the choice of form is a very important decision. People thinking about creating a business should seek professional advice.

When Does an LLC Become an Entity?

States allow several types of business structures, including limited liability companies, which limit the owner's personal liability for the business's obligations. When a business has a separate existence from its owner, as is the case with an LLC, it means that the business owner or an investor is much less likely to be held personally responsible for the debts of the business; however, you can only create an LLC through appropriate registration with the state. Thus, until the LLC's paperwork is properly filed, it does not legally exist.

Sole Proprietorship & Investment Accounts

The sole proprietorship is a very common form of small business, and beyond running their underlying business, sole proprietors are free to make investments and hold assets in investment accounts. These accounts can be used to augment savings for the business, to speculate on specific investment opportunities or to offset financial risks encountered in the sole proprietorship's business operations.

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