How to Protect Your Assets as an LLC Owner: Tips and Strategies

Last Updated on December 25, 2022 by Selina Parker

As a business owner, it’s essential to protect your assets. If something goes wrong with your business, you don’t want to be liable for any damages.

This article will discuss some of the best LLC asset protection strategies. We’ll also provide tips on choosing the right insurance policy and creating a solid estate plan. You can rest assured that your finances are safe and sound by taking these steps!

Forming your LLC is the first step in asset protection. This business entity type offers liability protection to its owners regardless of your operating agreement. So, if someone sues your business, the plaintiffs can only go after your business assets, and you will not be personally liable.

But the LLC’s liability protection is not bulletproof. There are still some situations where personal assets could be at risk. For example, if you guarantee a loan for your business, the lender can come after you if you default.

Understanding Limited Liability Protection

Establishing an LLC allows you to create business entities legally distinct from its owners. Limited liability protection is a result of this division.

If an LLC’s liabilities outweigh its assets, the LLC’s creditors can go after the company’s bank account and other assets. The personal belongings of the company’s owners, such as cars, houses, and bank accounts, are safe. Only the amount of money the owner has invested in the firm is at risk.

Obtain LLC Insurance

If someone files a lawsuit accusing you of wrongdoing—whether it’s negligently maintaining your building, wrecking the company van, or defrauding a customer—your LLC won’t protect you from personal liability. And the judgment in a personal injury lawsuit can be financially devastating.

As a result, an excellent liability insurance policy covers you and your company if your assets are in a critical condition.

Maintain Your LLC as an Independent Company

Personal responsibility for mixing personal property with corporate belongings would apply if a firm’s “alter ego” is held liable. There are indications that courts may extend this form of the liability to LLC owners.

LLC documents and finances should be kept entirely separate from the owners’ personal belongings to minimize the risk of alter ego liability. The LLC must have its bank account and credit card.

Contracts, invoices, purchase orders, and other critical papers should always bear the name of the LLC. It will help you avoid any potential conflicts of interest.

Set Up a Limited Liability Company Credit Score

Personal guarantees are one of the most common causes of business liability. If an LLC can’t pay, you agree to make payments if you guarantee a lease or a loan.

They may ask you to put your house or another significant asset as collateral for a business loan in certain circumstances. If the LLC fails to pay the debt, the lender may try to seize your personal belongings to pay off the debt.

You’ll probably get questions to personally guarantee large transactions if you’re starting a new company. But by establishing credit in your LLC’s name, paying your bills on time, and demonstrating a track record of revenue and profit, you may be able to avoid some guarantees in the future.

Keep Enough Money in the Account

If someone sues your company, the money in the LLC’s checking account is safe from creditors. They cannot use the funds to pay off business debts.

It only applies if the money is actually in the LLC’s account and not blended with other accounts. You should have a separate account for your LLC and never mix business and personal funds.

It’s also a good idea to keep enough money in the account to cover any potential judgments against the company.

Explore Strategies to Protect Your Assets from Personal Creditors

According to the IRS, personal assets can still get jeopardized if you face lawsuits due to personal wrongdoings or provided a personal guarantee. Some jurisdictions may use strategies to protect personal property from these claims.

In some states, you may create a trust immune from creditors, but before accumulating fundamental obligations or judgments, you must usually do so. Particular property, such as your primary residence and retirement funds, might be protected against creditors automatically.

You should consult with an estate planning and bankruptcy attorney to determine whether you can arrange your assets to protect you from responsibility for business obligations.

Keeping business and personal finances separate and having proper insurance can guarantee that your personal property is safe from company creditors. Although there is no such thing as absolute protection, careful preparation may help you reduce your danger.

Importance of Protecting Your Assets

Do not let your heart-earned assets get taken away because you have not done your homework and planned accordingly. Protecting your assets is one of the most important things you can do for yourself and your family.

Protects you from bankruptcy

One of the effects of bankruptcy is that your creditors can go after your assets. If you have significant assets, you could lose them if you were to declare bankruptcy. You can help ensure that this does not happen by protecting your assets.

Maintains your lifestyle

If you have to declare bankruptcy, your creditors will take away your assets to pay off your debts. It can include your home, your car, and other possessions. By protecting your assets, you can help maintain your current lifestyle because you still have the things that you need.

Safeguards your future

Another reason it is vital to protect your assets is that it safeguards your future. If you have to declare bankruptcy, it will stay on your credit report for ten years. It can make it challenging to get a loan, buy a house, or even get a job. However, if you have protected your assets, you will not have to worry about this because they cannot remove your assets.

It keeps you from becoming a burden on others

If you do not protect your assets and you have to declare bankruptcy, you may become a burden on your family or friends. They will likely have to help you pay off your debts.

Final Thoughts

Forming an LLC is just the first step in asset protection. You must also fund the LLC adequately, keep business and personal finances separate, and explore strategies to protect personal assets from creditors. It is best to consult a law firm or a registered agent that provides these services to determine the best course of action for your specific circumstances. Your attorney-client relationship could be an essential factor in protecting your business and personal assets.

By taking these precautions, you can help ensure that your assets are safe in the event of a lawsuit or bankruptcy.