Do Personal Bills Affect a New LLC?

By Ari Mushell, J.D.

Do Personal Bills Affect a New LLC?

By Ari Mushell, J.D.

Suppose you have significant debt. You want to get out of debt by starting a side business to help pay those bills. To that end, you want to form your new business as a limited liability company (LLC) to attain limited liability for business debts while taking advantage of LLC tax benefits.

Two people writing on paper between two laptops

You file the necessary paperwork and now have an operating LLC. Then you receive mail from creditors who threaten to take your house and garnish your wages. If your LLC is successful, is it liable for those debts? Usually, personal creditors cannot collect from the debtor's LLC, but there are some exceptions.

LLC Basics and Exceptions

An LLC is a business structure that makes the owner or owners of the business, called members, legally distinct from the entity itself. Limited liability shields the assets of the members from liabilities of the LLC—and vice versa. As such, if you face mounting debt and set up an LLC, your creditors cannot collect from the LLC.

 

Although you and the LLC are legally distinct, there are some instances when those holding claims against you can collect from the LLC.

Tort on Behalf of the LLC

Suppose you decide to launch a taxi service and organize an LLC for that purpose. You open a bank account under the LLC's name and sell your car to the LLC. While driving to pick up a client, you negligently skip a stop sign and accidentally hit a pedestrian. An ambulance arrives on the scene and takes the pedestrian to the hospital.

A week later, the pedestrian sues you and the LLC for negligence. You, as an employee/member of the LLC, acted as an agent of the LLC. Nonetheless, according to the Third Restatement of Torts, you can still be personally liable.

Signing on Behalf of the LLC

If you are careless and use only your name to sign a contract on behalf of the LLC, you can be liable for debt associated with that contract. This is especially important in the case of a new LLC, as you may not be familiar with the signing procedure. Providing your title along with your signature protects you from personal liability and prevents you from unintentionally blurring lines.

Using Personal Credit to Fund the LLC

As you and the LLC are legally two distinct entities, your new LLC is not responsible for your debt. At this time, you may regularly use your credit card to keep up your lifestyle. If you fund your LLC through your personal credit card debt, the LLC is responsible for that debt. Therefore, get in the habit of totally separating personal expenses from those of your new LLC.

Piercing the Corporate Veil

In legal terms, "piercing the corporate veil" means that your LLC is really just your alter ego. If you act in ways where there is little or no distinction between you and your LLC, creditors have the right to treat you and your LLC as one entity, making your LLC liable for your debt. Examples of actions that may allow creditors to pierce the corporate veil are commingling personal and business funds into one account and paying business expenses from your personal account. When starting your LLC, be careful to keep it entirely separate from your personal accounts.

Personal creditors cannot collect from a debtor's LLC because, as a business entity, an LLC is considered separate from its members and so are its finances. Exceptions do exist, though, so always make sure you are compliant with the basic rules of operating an LLC.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.