How To Maintain Limited Liability Protection

If you have a corporation or an LLC you want to know how to maintain limited liability protection. Limited liability protection helps to protect your personal assets from business debts and lawsuits. In short, limited liability protection provides an important shield for your personal assets. However, it’s not without vulnerability; learn how you can maintain limited liability protection.

What Is Limited Liability Protection?

In short, limited liability protection means that if your corporation or LLC incurs a debt or a judgment (or other liability), your personal assets (such as your home, your car, your bank accounts) can be protected. The extent and nature of that protection varies from state to state, so you want to be sure to speak with an attorney to make sure that you get it right.

However, limited liability protection is not impenetrable. In certain cases, creditors can “pierce the corporate veil” and use your personal assets to satisfy a judgment. Knowing how to maintain limited liability protection can help you protect against that outcome.

How Do You Maintain Limited Liability Protection?

The rules on how to maintain limited liability protection vary from state to state, and they depend upon the type of business entity that you are using (LLC, corporation, etc.) and what industry you are in. While we can give you the general principles here, the smart moves is to discuss your specific situation with an attorney.

  • Avoid Commingling Assets: While it may be convenient to use business funds for personal expenses and vice versa, it can be a costly mistake. This is called commingling assets and it should be avoided. In situations where it is shown that assets have been commingled, it can be easier to get at a business owner’s personal assets. Take the time to set up separate accounts for your business and then use them.
  • Have An Operating Agreement: When setting up an LLC, you should have an operating agreement (for a corporation this is called a shareholder agreement, btw) that defines all of the rights and responsibilities of members. Even if it’s just you. And then make sure that you follow the operating agreement and observe any formalities contained in it. A special caveat is that often services like LegalZoom or others that will help you set up a business will not offer you any sort of operating agreement (or if they do, it might not be appropriate for your state) – this is a huge problem and could put you at risk.
  • Complete All Necessary Filings: Finally, make sure that you complete all necessary filings with your Secretary of State. This is to ensure that your company remains in good standing. Remaining in good standing is key to ensuring that you maintain limited liability protection for your companies.

Again, this is not an exhaustive list of all of the things to do, but it helps to outline some of the basic principles.