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Why Does the Law Give You Liability Protection?

By Pantea I. Fozouni

August 24, 2020

Why Does The Law Give You liability Protection?

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.

What Does an LLC Protect you From And Why Does The Law Protect You?

What Does an LLC Protect you From And Why Does The Law Protect You?

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. In the eyes of the law, an LLC is seen as a separate entity. This means that an entity should be treated separately without having an impact financially on the owner.

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. It’s important that your form your LLC as a separate entity from you. Otherwise, the law will not protect you from liability. Here are a few other examples of situations where the law will not protect the owner of an LLC from liability.

Using LLC To Pay Personal Bills

If an owner of an LLC uses the companies bank accounts in order to pay off their own personal bills, etc., the law will not see your LLC as a separate entity and thus will not provide any protection from any liability.

Improper Funding

Improper Funding

Forming an LLC with a small amount of money in the bank account could cause some complications. For instance, if an owner of an LLC forms a company with only $1,000 in its bank account, whereas the initial amount required in the company’s bank account is $300,000, in the eyes of the law, your organization/LLC will not be seen as a separate entity. Therefore, the court will not give you the protection from liability when needed.

Tax Fraud/ Forming an LLC Improperly

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. Other than this, if an LLC is not formed according to the state's law, the court would not see your LLC is a separate entity and would not provide protection from liability.

Involving Other Businesses

If you're operating multiple businesses, you need to make sure the financing of each business is separate. You certainly cannot pay for business As expenses using business Bs bank accounts. If you do so, the court will not see your LLC as a separate entity and will not give you the protection from liability. Keep in mind by mixing money from other businesses will also result in creditors taking money from the different businesses you have along with your personal assets.

Get Insurance To Protect Yourself

Insurance, as we know, works to help a person pay off certain costs. When it comes to running a business, it can be quite crucial to have multiple insurances. For instance, if your LLC has to pay off for an accident, the insurance company will move in to pay for it. Therefore, it's a good idea to have insurance.

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.

Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.

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Legal Disclaimer: The legal information presented at this site should not be construed to be formal legal advice, nor the formation of a lawyer or attorney client relationship. Any results set forth herein are based upon the facts of that particular case and do not represent a promise or guarantee. Please contact a Family Business Lawyer for a consultation on your particular legal matter. This web site is not intended to solicit clients for matters outside of California.


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