Many entrepreneurs choose a limited liability company (LLC) since it protects their personal assets such as houses and properties from business debts and liabilities. In this agreement, people will only lose the money they have invested to a company and not all of their personal properties and possessions in the event of bankruptcy.
While LLC provides limited liability to owners, their personal assets are not protected if they:
• Treat the company’s asset like an extension of their personal properties
• Directly or personally injure another person
• Fail to pay taxes withheld from their workers’ wages
• Personally agree to become a guarantor for a business debt and bank loan on which the company failed to pay
• Intentionally commit a fraudulent, illegal, or negligent act which causes harm to the company or to another person
If any of the stated above has been committed, the LLC owner’s assets including cars, houses, and other personal possessions can be liquidated and to be paid to the creditors (suppliers, landlords, banks, and lenders).
To prevent the liquidation of personal assets, LLC owners should observe these legal obligations:
• Practice transparency in any transaction. This means that LLC owners should reveal the true financial status of their company to creditors, vendors, and other entities.
• Provide enough funds for the LLC’s operation. By investing enough cash to a business, expenses and other financial liabilities can be paid. Enough funding will also increase
productivity and viability while promoting smooth operation of the company.
• Create a formal and written operating agreement that will include the management structure, the percentage of ownership, profits and shares of each LLC owner, the rights and responsibilities of owners, expulsion and resignation policy, and other conditions.
• Treat LCC as a separate entity from personal assets. This includes opening a bank account strictly for business (no personal finances) and making a log book for the company’s sales, liabilities, and expenses.
Protecting LCC through Business Insurance
While LLC arrangement protects personal assets, there are certain conditions and situations which are not covered by this. With this consideration, lawyers suggest LCC owners to have a liability insurance policy which can be used when a court ignores the limited liability status.
A good insurance policy will not only protect personal assets, it can also shield the company from claims and lawsuits. However, commercial insurance companies usually do not protect corporate and personal assets from unpaid business debts.
LLC Tax
While LLC is almost like a corporation, it follows a different tax payment called “pass-through” where owners assume the responsibility on profits and losses of the business and are required to report these on their personal tax returns.
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