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What Does an LLC Protect You from? (Safeguarding Assets)

Max Smith

Reading Time: 9 minutes

Are you insecure about your personal asset security? LLCs are popular because they protect members from many unwanted situations. But what does an LLC protect you from? Does it provide solid protection for your assets from various troubles?

An LLC protects your personal assets from various legal obligations, like debts or lawsuits. It’s a legal entity, and it has a separation from your personal finances and properties. However, there are also exceptional cases of LLCs not covering your properties.

In this article, you will find a detailed discussion about your LLC’s power to protect your assets. So read on an I unveil the details!

The primary reason people choose an LLC is for its ability to protect members’ assets. The things an LLC protects you from includes:

  • Business debts,
  • Business lawsuits,
  • Personal injury claims,
  • Double taxation,
  • Financial losses,
  • Client distrust,
  • Members case & more.

Does an LLC Protect Personal Assets?

The purpose of an LLC is to optimize the security of personal assets from lawsuits. These lawsuits can be filed due to business debts, taxation, or other regulatory audits.

The court must adjudicate the issue if your business undergoes any financial downfall. So, if an LLC suffers losses, the creditors must approach the company for compensation. 

So, the members are not personally liable. As a result, their bank accounts, cars, homes, and other assets remain free from any lawsuit.

However, there are specific legal approaches to take so that your LLC membership does not act as an extension of personal finances. Otherwise, the law can disregard the existence of your LLC.

Undoubtedly, an LLC protects personal assets, but how does an LLC protect your personal assets in different circumstances? See below the ways in which an LLC protects your personal assets. 

  • Charging Orders

If the business does not serve the creditors’ interests, they cannot take possession of the properties or claim a forced sale. 

Only the income distribution documents can obtain charging orders from the creditors. So, the LLC limits its creditors to financial rights only and restricts ownership claims.

  • LLC Insurance

To make sure your personal assets are in a safe zone, get LLC insurance. It is a way to shield against liabilities. An LLC insurance policy helps you cover legal costs and damages due to lawsuits.

  • Operating Agreement

A crucial document is an operating agreement. It describes various rules for your LLC. So, it also contains rules regarding members’ special privileges or liabilities. Thus, it indicates the member’s limitations, contributions, responsibilities, and legal rights.

  • An Independent Entity

LLC has its own legal identity. So you must be aware of it and use the LLC’s name for business purposes. 

  • Maintaining LLC’s Accounts

After opening a business account, you must maintain it. Make the business transactions using the business account. Also, keep enough liquidity for the business. So, put money in your LLC business account.

  • Establish LLC Credit

Enhance the LLC’s credibility in the market so you can quickly get loans for your LLC. So there will be no need for your personal guarantee anymore. 

  • Separate Bank Accounts

If you have an LLC, you must create a business account. You cannot mix up your personal and business transactions in the same bank account.

Aren’t you curious to know what kind of troubles an LLC protects you from? Jump to the next section and find out!

How Does an LLC Protect You in a Lawsuit?

Protecting against a lawsuit is the main appeal of an LLC. Let’s see below how it protects against lawsuits.

  • Defendant

The rule is that the plaintiff must name the LLC as the defendant when there is a lawsuit. They cannot accuse the individual owners. The legal actions are directed against the LLC.

  • Separation of Assets

Separating personal and business assets is the fundamental feature of an LLC. So, the LLC’s assets are at risk, whereas the members’ assets are safe.

  • Limited Liability

As the name suggests, ‘Limited Liability’ in LLC stands for protection. A member’s liability is limited to the LLC’s assets.

  • Damage Collection

If the LLC is found guilty in court for the lawsuit, the plaintiff can collect damages only from the LLC’s assets. As a result, the member’s assets remain untouched.

  • Creditor Protection

Suppose the lawsuit is for debts or financial troubles. In that case, the creditors cannot go after the owner’s bank account, house, vehicles, or other assets.

  • Financial Risk

In the event of a lawsuit, the only risk the members are at is the amount of their investment in the LLC. Their liability in the lawsuit is limited.

  • Veil of Protection

The members’ personal assets are under the LLC’s veil of protection. The owners are in no danger if there is no piercing of the veil.

Does an LLC Protect Assets from Nursing Homes?

Yes, but your LLC must meet the conditions to protect your assets from nursing homes.

They are:

  • LLCs must be formed in compliance with state legislation.
  • The LLC is formed before the debt is incurred.
  • Ongoing obligations, including annual reporting, must be performed.

Before getting into the details, first learn about Medicaid.

It is a joint program of the federal and state governments in the United States. It provides health coverage for certain people for health-related services. Nursing home care is one of those services.

Medicaid provides coverage for nursing home care. To be eligible for this service, the assets must be counted. People generally utilize this when their personal funds run out.

It does not matter if they are business assets of your LLC. As long as those assets are registered in your name, they can be considered part of your wealth.

Does an LLC Protect Your Business Name?

LLC does not protect your business name or the name of your brand. Your LLC is just a business structure. It is formed only for legal and tax purposes.

Someone can use your business name, and you won’t be able to stop them from doing that with just an LLC.

You can have your LLC business name protected only within the state where it is registered. When you form an LLC, the state prevents other businesses from using an identical or similar name.

The problem is that the protection is limited only to the registration state. That means other businesses can pop up with your name in any other state.

But protecting your brand name is imperative to you, right? So how do you protect that?

A TRADEMARK is the solution!

As an LLC does not automatically give you protection, register the name with a trademark. It firmly secures the name and gives you the exclusive right. 

You must apply to the United States Patent and Trademark Office (USPTO for trademark protection). Once approved, you will receive sole rights to your business name at the federal level nationwide.

Does an LLC Protect Against Malpractice?

While an LLC offers a shield from many concerns, it does not cover the malpractice claim.

An LLC provides protection, but that protection is limited. It is only for business debts and liabilities.

On the other hand, malpractice, professional negligence, or misconduct claims are against individual members. In these cases, individual members are held personally liable for the damages.

Collect malpractice insurance if you are in a professional field where malpractice claims are a concern. These claims put your assets at risk. This insurance covers legal expenses and damage compensation from malpractice claims.

As you learned about LLC protection in some scenarios, what about child support? If it’s a concern for you, the discussion is coming up next.

How to Protect LLC from Child Support

Your LLC is not liable to pay child support. That’s because an LLC is separate from your personal assets. However, child support services cannot garnish payments from a business account.

There are also some strategies to protect your LLC from child support payments.

  • Do not conceal your income.
  • Make sure you are lawfully operating as a business.
  • Separate your personal and corporate finances.
  • Keep precise records.
  • Make sure you understand your responsibilities.
  • Set a salary for yourself.
  • Create a legal arrangement, such as a postnuptial agreement, to provide contractual protection for your business.
  • Before filing your taxes, be sure your child support is up-to-date.
  • Consider reinvesting your profits
  • Generate diverse streams for your income
  • Regain your initial investments before undergoing any financial obligation

On the other hand, there can be a situation when an LLC pays child support. Some exemptions from child support include:

  • Money that enters a bank account that an LLC doesn’t cover.
  • When money is spent for non-business purposes.

Many states, like Indiana, Georgia, and Atlanta, can go after your LLC if you cannot provide for child expenses. It may even result in the seizure of your bank accounts, the interception of tax refunds, and your LLC assets.

Is an LLC Protected from Personal Judgment?

Yes, but not totally. If you have debts personally, LLC will not be liable. However, if you fail to repay, your interest in the LLC will be at higher risk. 

The creditor may get your interest in the LLC. So your ownership portion of the LLC, will be used to repay your creditor’s loan. 

The LLC is not directly liable for your judgment, but it will give your profit to your creditor based on a court decision.

Nevertheless, there are situations when your LLC is not obligated to protect you. Do you want to know the exemptions? The following section discusses such cases.

When Does an LLC Not Protect You?

LLCs do a great job protecting personal assets by projecting a shield. But in some scenarios, that shield is not impenetrable. Knowing about those times when an LLC will not protect you is beneficial.

Check out them below.

  • Personal Guarantee

Suppose an LLC member takes out a business loan or a debt for the LLC by providing a personal guarantee. In that case, the LLC cannot offer complete protection. Because that guarantee suspends any limited liability coverage by the LLC.

For instance, while getting a bank loan for the company, it requires a personal guarantee. If the LLC cannot repay debt, it is automatically transferred to the guarantee-providing member.

  • Piercing Corporate Veil

The corporate veil is there to protect personal assets. But suppose you pierce it by removing the distinction between business and personal assets. In that case, the LLC does not protect you. It is like mingling both funds.

Piercing can happen if you deposit business revenue into a personal account or pay your bills with a check. The court will deem these actions to be piercing the corporate veil.

Another way to pierce the veil is by not forming the entity correctly. For example, filing the correct paperwork with the state or terminating the LLC after adequately winding up.

  • Negligence and Misconduct

Your LLC will not save you from wrongful acts like

  • Assault or fraud,
  • Using the business as a shelter for an illegal enterprise.
  • Neglect to meet the legal obligations & more.

In legal terms, these fall under tort participation. Tort activities like intentional misconduct and criminal actions will jeopardize the limited liability protection.

  • Environmental Violations

There are environmental laws that hold LLC members personally responsible for environmental clean-up.

The Superfund Law (formally known as the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA) has some strict laws. Those are imposed by the U.S. Environmental Protection Agency (EPA). 

Any LLC members who have or had the authority to decide hazardous material disposal are liable for that action.

  • Engaged in Illegal Work

If your LLC engages in an illegal act, the court will stop your LLC from doing any activity. As a result, your LLC will no longer be able to protect your assets.

  • Personal Debts

Personal debts like upholding payroll taxes are liable only to you. Your LLC will not pay it. Ultimately, you are responsible for your debts, and your LLC cannot help you.

Conclusion

So, now you might already know the answer to the question, “What does an LLC protect you from?” It offers the asset’s safest facility that protects it from legal obligations. But you are responsible for your personal liabilities.

Suppose you successfully maintain your LLC and keep a separate account from your personal accounts. In that case, you will enjoy the LLC benefits, including asset protection. It will help you venture into business with confidence and security.

Key Points

  • An LLC shields personal assets from business-related lawsuits.
  • If the business faces financial issues, creditors can only pursue compensation from the company. Not members’ assets.
  • LLCs can protect your assets. However, limiting business transactions within your accounts is only valid.
  • Your LLC protects you from business debts, lawsuits, and personal injury claims. You also get protection from double taxation, financial losses, and client distrust.
  • When an LLC protects you in a lawsuit, it becomes the defendant. You can enjoy asset separation, limited liability, safety from creditors, and a veil of protection. Also, this helps you to be safe from damage collection and financial troubles.
  • An LLC does not directly protect your assets from nursing home costs. If they are registered in an individual’s name, they count towards Medicaid eligibility. The asset’s origin is irrelevant here.
  • Forming an LLC means the state of registration restricts identical business names within its borders. But it does not automatically safeguard your business name or brand nationwide.
  • To preserve your business name and brand identity, register with a trademark. It will ensure national-level protection. You can secure trademark protection from the United States Patent and Trademark Office (USPTO).
  • LLC is not designed to protect against malpractice claims or professional negligence—secure malpractice insurance, as these claims pose a risk to personal assets.
  • An LLC does not protect you from personal judgements.
  • As a non-custodial parent, you must approach child support obligations with transparency. It will restrict the child support agencies’ access to your LLC assets.
  • The situations in which an LLC does not offer complete protection are numerous, such as personal guarantees, piercing corporate veil, negligence, and more.
  • Creditors can reach the individual members if they are piercing the veil or if negligence and misconduct are proven in court.
  • The Superfund Law and other environmental regulations can also undermine your LLC’s protection. These hold LLC members personally responsible for acts falling under tort.

Frequently Asked Questions

Does a single member LLC protect your personal assets?

Yes! A single-member LLC is a legal entity. So, it offers you the facility to protect your assets from liabilities. You may form an LLC or transfer your assets to your LLC to get complete protection from legal obligations.

Does an LLC protect you from the IRS?

No! An LLC cannot save you from the IRS. You must pay your business taxes and payroll taxes on time. Otherwise, it may cost you a penalty and put your assets at risk.

Max Smith - LLC Formation

He is a seasoned entrepreneur and legal expert at LLC Formation Hub. With a stellar track record in both business and law, Max simplifies the complexities of LLCs. His practical insights, featured on LLC Formation Hub, empower entrepreneurs across the USA. Max merges business finesse with legal acuity to guide businesses toward success.


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