You registered your business as an LLC. Whew. Now you can relax, right? You no longer need to worry about personal liability from business debts.
Unfortunately, it is not that simple.
If a creditor is attempting to collect debt from your business but you do not have sufficient assets to satisfy the debt, the first thing a savvy debt collector will do is look for a way to invalidate your liability protection. The debt collector will go after your real property (land or structures), your car, or other personal assets.
If the creditor can prove that you have not operated your business separately from your personal affairs, he may successfully persuade the courts that the LLC designation is a “mere sham” and that your personal assets are fair game.
So, what do you need to do in order to ensure that your liability protection is adequate? The specifics depend on your unique circumstances, and I would be glad to discuss them with you. In the meantime, below are four important general rules to keep in mind:
Maintain separate personal and business bank accounts, even if you have no other employees. Commingling of funds is a significant factor considered by the courts. Similarly, maintain separate bookkeeping records.
If you loan personal funds to your LLC, document it as a loan or capital contribution.
Never loan money to yourself from your business, and make sure all business assets are properly titled to the business.
Don’t confuse your business name and personal name when executing contracts. Always list the LLC as the party on the contract, and sign in your official capacity for your business. Also, when possible, do not sign a personal guarantee.
Many business owners are surprised to learn that registering their business as an LLC is not enough, by itself, to protect their personal liability from business debts. Hopefully you did not learn this lesson the hard way.
Take a few moments to consider whether you have operated your LLC completely separately from your personal life. If the answer is no, it is important that you take immediate action to protect yourself. And if you are not sure, give me a call, I can help!
If you’d like to learn more about this subject, or about organizing your business in general, here is how to get in touch with us today.