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Does an LLC Protect You From Liability?

By Pantea I. Fozouni

August 12, 2020

Does An LLC Protect You From Liability

Does An LLC Protect You From Liability?

Running a business might seem like an easy route to success. However, if you ask any businessman, they will let you know how difficult it is to create a good brand image and understand between the business and customers and employees. Other than this, there are many risks involved for the person running the business in cases where the business is held responsible for wrongdoings or going bankrupt.

This is why some people tend to form an LLC because they believe it protects them from liabilities. Even though to some extent, this is true, there are still many cases in which an LLC owner might not get protection from liability.

If you’re wondering what the disadvantages of running an LLC are and to what extent it can protect an owner’s personal property and money, you’re in the right place. Continue reading on as we will be mentioning everything there is to know regarding this topic.

What Does an LLC Protect you From?

Many people who want to start a business, move towards forming an LLC. The reason behind this is that an LLC as the name suggests, it will protect you from liability. However, the word limit is there as well in the name, which means there will be some cases in which you might have little or no protection.

An LLC deals with all sorts of liabilities or debts that an operating business incurs. In most cases, the business owners are safe as their personal properties and money are not touched when the business isn’t able to repay a loan taken from other sources. However, suppose the owner has made a personal guarantee of returning the money. In that case, the owner will be held responsible, and the creditors might take the owner’s property or money in exchange for the loan.

In other cases, such as wrongdoings, the business will be held responsible for their actions. However, the question is whether the owner will receive protection or not. The answer is simple, if the employee or co-owners of the business end up doing something wrong, they would be held responsible, and the business would have to pay for their wrongdoings. Therefore, this means the owner’s personal money and properties would be safe. However, if the owner had a say in the wrongdoings or knew about it and still remained silent, the owner’s property and money could be unsafe.

Cases Where This Is No Protection

We have mentioned above the cases in which the owner of an LLC would be safe. Now we are going to move on to situations that would result in the owner’s personal belongings being unsafe.

Tax Fraud

Taxes are something every business pays. Many businesses that don’t give taxes importance end up paying hefty fines for not doing their taxes right. This is one of the reasons the need for accountants in such businesses has gradually increased. Therefore, even LLCs must observe and pay off taxes accordingly, but if they don’t, the owner would have to face the penalties of not doing so.

Does an LLC protect you from liability

Wrongdoings

Wrongdoings could be anything that harms the business, stakeholders, or the public. For instance, if the owner wrongfully fires an employee based or race or religion, the employee would have the right to sue the owner. Therefore, this means the employee could take the owner’s personal assets for justification.

Personal Guarantee

If the owner takes a loan from another source and guarantees to pay back, this would mean that when it comes to paying back the loan, the owner would be held responsible if the business cannot pay it. Therefore, this means the creditors would have the right to hold onto the owner’s personal assets if the business cannot afford to pay the creditors back.

Can The Owner Be Sued?

One of the risks of forming an LLC is that you are personally named in a lawsuit with the company. When it comes to running an LLC, it is essential to keep your personal finances and operations separate from the company. If you secretly use the business’s finance for personal use, you could find yourself held responsible and have to pay for it.

Other than this, an LLC owner has to make sure not to commit any wrongdoings or tax frauds as these two factors are the easiest and quickest ways for the owner to end up in court with the risk of losing personal assets.

If you’re wondering how an owner can protect themselves from such situations, well, the answer is proper paperwork. Whether it be banking or other leases, having a proper written agreement would keep the owner safe from personal liability. However, if the paperwork includes the member’s wrong name or position in the LLC, it could result in personal assets held

Conclusion

As you can see, we have mentioned all there is for you to know regarding this topic. An LLC does protect the owner’s personal assets, but to some extent. We have mentioned the cases where the personal belonging of the owner would be unsafe and safe. If you’re wondering whether to form an LLC or not, you need to keep in mind following the right procedures.

Other than this, keep track of everything going around the business so that nothing comes back at you wrongly.

This article is a service of Pantea I. Fozouni, Family Business Lawyer®.

The Palm Desert Law Group specializes Trust Administration, Business Law and Planning for Parents of Minor Children.

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