Limited liability protection helps to protect your assets from business debts and lawsuits. In short, limited liability protection provides an essential shield for your personal assets. Limited liability comes from a well-run corporation or LLC. However, it’s not without vulnerability; learn how you can use this type of legal protection.
Limited liability protection for when things go awry. Image from rawpixel.com
What Is Limited Liability Protection?
Limited liability protection means that if your company incurs legal liability, personal assets stay 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.
The law does not provide impenetrable protection. In some instances, 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.
Why Even Care About Limited Liability Protection?
Let’s be frank. Despite our best efforts, every business has risks. While insurance plays a role in protecting our assets, limited liability does a ton of work to protect company owners. The legal system provides essential tools to reduce risks to those who start and build businesses.
Without limited liability, owners’ assets are put at risk. If somebody gets a legal judgment, that person can ask to use company owners’ assets to satisfy the judgment. That means that if a company owner owns a house and there is a business dispute, the house could be at risk.
Pay attention to limited liability protection. It gives you peace of mind.
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 are 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. The legal system calls this “commingling assets.” Avoid doing it. If a court rules 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. Online legal services often fail to provide appropriately customized operating agreements. Buyer beware.
- 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. Staying 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.
What Types of Companies Offer Limited Liability Protection?
Not every company type provides the same level of protection. Some provide solid protection. Other types do not protect at all.
Typically, a properly-run LLC or a corporation provides protection to owners. Also, special types of companies, such as limited liability partnerships or professional corporations, give protection.
Company types such as a sole proprietorship offer no such protection. Similarly, general partnerships offer little protection.
Key point: the rules vary from state to state, so talk to an attorney about your planned business setup.
The Limits of Limited Liability Protection
As a creative business owner, you may be aware that limited liability protection shields your personal assets. However, this protection does not cover everything. Like many things, it has limits that you should understand.
Limited liability protection does not extend to criminal or fraudulent activities.
If you or your employees engage in illegal behavior, you may still face personal liability. Additionally, if you personally guarantee a loan or contract, you may still be held liable for those debts even if your business is a separate legal entity.
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