Want to run a business?
Thinking about what will happen to your personal assets in case things don’t go as planned?
The modern world of entrepreneurship is so competitive that it is challenging to find a footing without moving fast and thinking big.
New entrepreneurs and agility go hand-in-hand. However, the problem arises when entrepreneurs start overlooking things that are critical to the existence of business and themselves. Many of these things could result in severe legal and financial mistakes.
And one of the most common beginner’s mistake is not to set up a legal entity.
- The Outcome of Not Creating a Legal Entity
- So, What is the Solution?
- LLC – Best of (Partnership+Sole Proprietorship + Corporation) in One Business Structure
- How Does the Limited Liability Protection of LLC Works?
- Limited Liability Exceptions
- Tips for Protecting Your Assets as Owner/Co-Owner of an LLC
- To Conclude
The Outcome of Not Creating a Legal Entity
Without a legal entity, the law treats your business as a Sole Proprietorship or a Partnership. Both these business structures do not protect your personal assets like the bank account, home, car, etc. If your business has an unpaid debt and any entity/individual files a suit for recovery, these personal assets can be used for the settlement.
And if you know anything about the modern world of business, the days when only the bad guys were dragged to the court are long gone. If you are transacting business even with the general public, you expose yourself to several potential lawsuits that can end up consuming your personal assets.
So, What is the Solution?
As you might have already understood, the solution is to create a legal entity. But what kind of legal entity? Preferably an LLC. Read more about LLC here.
Let us have a look at how LLC can protect your personal assets.
LLC – Best of (Partnership+Sole Proprietorship + Corporation) in One Business Structure
In simple words, LLC creates a type of buffer between the business liabilities and your assets. While setting up an LLC is more complicated than a sole proprietorship or partnership, once established, it is significantly easier than a corporation to run.
However, the protection or the buffer is in no way absolute. Understanding the limited liability protection and exceptions would make it easier for you to make the right decision.
How Does the Limited Liability Protection of LLC Works?
Once created, LLC helps you form a business entity which is separate from the owners, Legally. Whatever your business owns and you own personally are completely separate from one another. This separation is the buffer of personal asset protection.
However, it is limited in nature.
With this limited liability protection, the creditors are only allowed to use the bank account and other assets of the LLC for settling debts or liabilities. This means that the personal assets of the owners, like their bank accounts, homes, and cars etc. remain safe.
In other words, if you’re an owner of an LLC, at the most, you’ll lose the money you’ve invested in your business.
Let us now have a look at the exceptions to this limited liability.
Limited Liability Exceptions
Just as every other thing in life, the limited liability of LLC also has exceptions. The same limitations along with others also apply to corporations.
Some of them are as follows-
- Personally guaranteed debts
- Unpaid payroll taxes
- Liability due to own wrongdoing
- Direct and personal injury to someone
- Mixing LLC with Personal Assets
While there are a few exceptions in limited liability, it is still one of the biggest advantages of creating an LLC. Moreover, there are a few ways in which you can keep yourself protected.
Tips for Protecting Your Assets as Owner/Co-Owner of an LLC
- Keep your personal business and LLC separate
- Adequately fund your LLC
- Act legally and fairly
- Try to take credit in the name of your LLC
- Obtain an LLC insurance
Creating a legal entity in the form of an LLC is a wise decision if you are planning to launch a new business. Even with the exceptions and certain limitations, it offers excellent protection to your private assets which sole proprietorship or partnership do not provide. Moreover, it is also easier to run an LLC as compared to a corporation.
Remember the tips discussed above to tackle the exceptions of limited liability protection and avoid risking your private assets as a business owner.
Apart from these tips, there are also other strategies to keep your assets protected. These strategies would depend on the state where you conduct your business. Consult your legal advisor for the same.
Last Updated: 30/11/2018