Understanding LLC Protection
When you form an LLC to operate your business, you are ordinarily not personally liable for the LLC’s debts. As an LLC owner, called a “member,” you contribute money to start the business. You are not an employee. If the LLC cannot pay its debts, creditors can normally only take the assets owned by the company, not the personal assets of the owners. However, you can also be responsible for LLC debts in some cases.
An LLC protects your personal assets from business liabilities. This shield means in most cases business disputes cannot claim your personal assets. For example, if a customer sues your LLC and wins, they cannot personally be liable for damages.
States treat LLC owners differently regarding personal liability. Texas protects members better than other states.
Best Practices for LLCs
Maintaining your LLC properly matters. Failing to comply with state laws negates liability protection.
- Get LLC insurance to cover legal errors by your company. This can pay costs if you get sued over your business.
- Keep your LLC independent. Mixing finances pierces the legal veil between you and your business.
- Sign contracts for your LLC, not yourself, when possible. This separates you from company dealings.
Personal Liability in Certain Situations
Are you personally liable under an LLC? An LLC protects your personal assets from business disputes in many cases. For example, if a customer sues your LLC and prevails, your personal assets are usually safe from damages. However, there are situations in which members of an LLC can potentially become personally liable for the company’s actions, including instances of fraud, unpaid debts, and specific contractual agreements.
If you commit some kind of wrong towards a client or employee of the LLC, you can be personally liable. Owners of a business can be held personally liable under State and Federal labor law if the company fails to pay employee wages, payroll taxes or fails to contribute to employer-sponsored retirement plans. Any LLC owner who personally guarantees an LLC debt will be personally liable to repay the debt if the LLC defaults on its payment.
In legal terms, this is referred to as “piercing the veil” because this essentially shatters the legal barrier between you and your business. The general rule is that members of an LLC enjoy limited liability and cannot be sued personally for activities or debts of the LLC.