LLC Asset Protection: Are Your Personal Assets Really Protected?

Limited Liability Companies, or LLCs, are often touted as the best legal business structures for entrepreneurs — and for good reason. An LLC can protect your personal assets and ensure that, even if another party takes legal action against your business, your personal loss will be minimized.

But just how much can an LLC protect your assets? Are there any exceptions that can leave you vulnerable? And is an LLC really the best choice to keep your business and your bank account safe? We'll explore those questions and more so you'll understand LLC asset protection and why an LLC remains a top choice for upcoming business owners.

Does an LLC Actually Protect Your Assets?

Yes, an LLC will protect your assets up to a certain point. LLCs and other legal business entities are designed to offer protection for your personal assets. That means you won't be personally liable for legal action taken against your business, but it also means business-related assets may still be at risk (more on that later).

However, when compared with sole proprietorship (which happens when you operate a business without a legal structure), the protection an LLC offers is incomparable. Sole proprietorships can leave all of your assets — from your bank account to your cars and even your home — at risk of being confiscated by creditors, the government, or the legal system. An LLC or similar entity gives you the best chance of keeping those personal assets safe, regardless of any pending legal action.

How LLC Asset Protection Works

When you go through the LLC formation process, you create an entity that is legally separate from your personal identity in order to keep your personal assets protected. Why do savvy entrepreneurs choose this route? Take a look at the following scenarios to see how your personal assets could be at risk:

Scenario A: After a negative experience with a vendor, that vendor wants to sue you for breach of contract. When your assets are protected by an LLC, the vendor can sue your business, but without cause, they cannot come after your personal money or assets.

Scenario B: Your business has had some financial struggles, and creditors are demanding repayment and threatening to take action. The money in your business bank account is at risk, but if most of your cash is in a separate personal account, your biggest asset is still protected.

Scenario C: Let's say one of your primary reasons for forming an LLC was to protect your individual privacy. If an angry customer threatens to sue your business but only knows your business name, they won't be privy to your personal identity. Unable to sue you personally, they'd only be able to take action against your business.

All of these scenarios may sound scary, but think of how much worse they would be if your personal bank account, your car, and your home were also at stake. Running a business always comes with its fair share of risks, but these can be mitigated by forming an LLC that keeps your personal assets protected.

Which Assets Are Protected by an LLC?

While there are always exceptions, you can assume that anything you purchase in your own name that is not tied to your business stays protected when you form an LLC. These assets include:

• Your home or other properties bought under your personal identity
• Your cars or vehicles (as long as they are not "work" vehicles purchased by your business)
• Your personal bank accounts or any cash that isn't linked directly to the business

These assets cannot be taken via your business or by anyone seeking restitution or compensation from your business.

Are My Assets Protected by My LLC?

 

Which Assets Are Not Protected by an LLC?

Of course, not every asset is protected by an LLC. Typically, vulnerable assets include those tied to your business, such as:

• Offices, facilities, or other properties purchased by the business
• Work vehicles registered in the business's name
• All business bank accounts
• Personal assets that were used to guarantee business debt like loans or lines of credit*

*Pay careful attention to this last one. Some creditors will ask you to pony up your personal assets as collateral or as a guarantee to approve you for a loan or a line of business credit. Be aware before you sign anything, and understand when a business creditor is (or isn't) justified in coming after your personal assets.

FAQs About LLC Asset Protection

How does an LLC protect you? Here are some of the most common questions about LLC asset protection:

What Is the Best Business Structure for Asset Protection?

The best business structure for asset protection is a legal business entity. This includes an LLC, S Corp, or C Corp — all of which offer liability protection. An LLC is the most popular choice, typically due to its flexibility and low cost. When it comes to asset protection, any legal business structure is better than operating as a sole proprietor, which could leave your personal assets at risk.

How Do I Set Up a Business to Protect Personal Assets?

You can set up a business to protect your personal assets by forming a legal structure with your state's business formation agency (usually the Secretary of State). You can also choose to use a formation partner like Bizee. See our how it works to explore the process. Once you've decided on an entity, follow the process to form your business online and experience immediate liability protection.

Does an LLC Protect You From the IRS?

An LLC does not protect you from the IRS, since you still need to pay business taxes and payroll taxes as usual. In fact, if you're behind on submitting payroll taxes, your personal assets could be in jeopardy and you should submit as soon as possible. Avoid this scenario by simply ensuring any tax withholdings are submitted to the IRS in a timely manner.

Does a Single-Member LLC Protect Your Personal Assets?

Yes, a single-member LLC will protect your personal assets just as a multi-member LLC will. Forming an LLC is an important step for single-member businesses and will help create the necessary separation between your personal and business assets. This is just as critical for multi-member LLCs, as formation protects you, your members, and the business as a whole in case one member runs into financial or legal trouble.

Tips for Protecting Yourself With an LLC

An LLC gives you the best chance of protecting your personal assets, but it isn't completely foolproof. There are scenarios in which your personal money and belongings may be at risk:

• Failing to pay or becoming delinquent on payroll taxes
• Conducting fraudulent activity on behalf of the business
• Negligence that leads to personal injury of another person
• Breaking the law while operating your business
• Mingling personal and business finances inappropriately

Do you notice a common theme among the liability scenarios? Nearly all of them are related to specific actions — often inappropriate or even criminal — on the part of the business owner. As long as you are conducting business responsibly and ethically, you likely won't need to worry.

However, sometimes things happen that are out of our control, especially in the case of accidents and personal injury. You can take additional steps to increase your liability protection and ensure your personal assets are safe.

Consider LLC Insurance

Business insurance is an important but often overlooked element for any business owner. Additional liability insurance for your business can reinforce the protections offered by your LLC and can cover unexpected or unintentional situations, such as personal injury occurring on the business premises, damage to your business facility, or damage to a company vehicle.

Make sure you understand your business insurance options and make a choice that will offer your business the greatest amount of protection.

Establish Credit in Your LLC's Name

Business credit is built separately from your personal credit. It can take time, and it's something you should start working on right away. While you don't need to have a great credit score to start a business, keep in mind that banks and lenders will look at your personal credit history early on when you don't have established business credit.

Opening a dedicated business bank account, putting bills in your business's name, opening a business credit card, and paying everything on time are all great steps to building your business credit.

Keep All LLC Records and Finances Separate

Separation of personal and business finances is probably the most critical action you can take to protect both your business and your personal assets. If legal action is taken against your business, you'll need records showing exactly what belongs to the business and what belongs to you. Opening a dedicated business bank account is your most important initial step. After that, you'll need to stay accountable by keeping accurate records and staying on top of business bookkeeping.

Maintain a Financially Lean LLC Account

Of course, you'll want to have enough money in your business bank account to cover your expenses, but you also don't need to have huge overages. Whatever cash is in your business account is vulnerable to legal action or action taken by creditors. Make sure you stay on top of paying important bills and making payouts to owners so that excess cash isn't building up.

Be aware, however, that protected funds must be transferred out of a business account before a debt is owed or legal action is taken. If transferred to a personal account afterward, it may be considered a fraudulent transaction.

You're Liable to Love an LLC

An LLC is an excellent choice for business owners who want legal liability protection along with many other benefits. Business ownership always comes with certain risks, but you can give yourself peace of mind and improve your chances of success by forming an LLC. File now for $0 + your state fee with Bizee, and start experiencing the benefits of liability protection right away.