When you own a business, either individually or with others, there are certain types of risks that are inherent. Reducing your own personal liability is a top priority. For this reason, a limited liability company (LLC) is often recommended as a basic business structure. However, as experienced Lake Jackson business formation attorneys, we want you to be aware of some of the risks that still exist and the steps you can take to protect yourself.
Liability Protection Available by Forming an LLC
A limited liability company, otherwise referred to as an LLC, is one of the most common types of business structures in Texas. Under Chapter 101 of the Texas Business Organizations Code (BOC), rather than being a partnership or a corporation, it is a distinct entity in which owners are referred to as members. An LLC can consist of one person alone or it may have multiple members and is similar to both a general and limited partnership in that all of them are free to participate in management duties. In addition to flexibility, it also offers tax advantages but, as the name implies, one of the biggest benefits is its ability to reduce personal liability risks.
LLCs are generally valued as a business structure in that they protect the personal assets of members. If you are sued or face creditor claims, only the assets of the LLC itself can be subject to a judgment lien, with few and extraordinary exceptions. The same is true if the business fails. This ability to reduce personal liability risks and protect property, such as your family home, car, bank accounts, or other investments, is one of the major reasons to choose an LLC.
However, it is important to know that the liability protection an LLC affords members does have limits. In very limited circ*mstances, you can still be held personally liable for certain act or omissions, which is known as “piercing the corporate veil.”
Additional Steps to Reduce Your Risk
An LLC can be formed by filing the appropriate forms through the Texas Secretary of State and preparing the appropriate organizational documents. To further reduce personal liability risks, take these additional steps:
- Confer with an insurance expert and invest in liability insurance coverage;
- Always act in the LLC’s name when signing contracts or other legal documents;
- Do not mix personal assets with the LLC;
- Review contracts and loan documents carefully to ensure there are no clauses allowing for personal liability; and
- Confer with a business attorney to ensure the documents are only completed, but that those documents are completed properly.
Contact Our Brazoria County Business Formation Attorneys located in Lake Jackson, Texas
To find out more about how to reduce your personal liability as a business owner, contact our Brazoria County business formation attorneys located in Lake Jackson, Texas at Cordoba Law Firm, PLLC, and request a consultation in our Lake Jackson office today.
FAQs
An LLC or limited liability company is a type of corporate structure that legally separates personal and corporate liability in matters of legal dispute. Put in simpler terms, an LLC ensures that you can't be held responsible for issues with your company, at least to some extent.
Do LLCs actually protect you? ›
To protect your personal assets from business creditors and lawsuits, an LLC might be the right corporate structure for your enterprise. By creating a separate legal entity for your business activities, this provides you with an arms-length protection from those business liabilities, in most cases.
Are you personally liable under an LLC? ›
The general rule is that members of an LLC enjoy limited liability and cannot be sued personally for activities or debts of the LLC. In other words, the “corporate veil” of the LLC legal structure protects its members from personal liability.
Is my LLC protected from my personal debts? ›
An LLC creates a shield between business liabilities and personal assets. This means, in most cases, a lender can't force the owner to repay a loan taken out by the business. Nor can someone awarded damages in a lawsuit against the business require the owner to make good on it.
How do I lose my LLC protection? ›
1. Lack of real separation between the LLC and yourself
- Using the LLC's bank account to pay your personal bills.
- Depositing checks made out to the LLC into your personal bank account.
- Failing to keep minutes and business records for the LLC.
- Not creating bylaws for your LLC.
- Setting up your LLC with insufficient capital.
Placing your home, cash, stocks, and other valuable property into an irrevocable trust can help protect your assets from LLC debts and other legal obligations.
What does LLC not protect against? ›
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.
What happens if LLC files bankruptcies? ›
In a Chapter 7 business bankruptcy, the LLCs assets are sold and used to pay the LLC's creditors. After the bankruptcy, the LLC's remaining debts are wiped out and the LLC is no longer in business. The LLCs owners are generally not responsible for the LLCs debts.
Can a personal lawsuit affect my LLC? ›
Like most states, California does not permit personal creditors of an LLC member to have a court order that the LLC be dissolved and its assets sold to pay off the creditor.
Can a debt collector come after a LLC? ›
Limited liability essentially puts a wall up between your business and personal assets. For instance, if the business owes money to a creditor, that creditor can't pursue your personal assets to pay off the debt – they can only go after LLC's assets. That's because you don't own the business.
If the corporation or LLC cannot pay its debts, creditors can normally only go after the assets owned by the company and not the personal assets of the owners. However, the business owner can also be held responsible for corporate or LLC debts in certain situations.
Does a single member LLC protect your personal assets? ›
A single-member LLC is generally shielded from personal liability for debts associated with the business. Note: Single-member LLCs must be careful to avoid commingling business and personal assets. This could lead to what is called piercing the corporate veil and the loss of your limited liability.
Should I start an LLC for my side hustle? ›
“An LLC saves liability. It's the first and most important step in asset protection,” says Ratelle. “It gives you that fence between your business money and your personal money.” Given that, the quick answer to the question “do I need an LLC?” is probably yes, and sooner than you think.
Why an LLC may not be beneficial? ›
Tax complications.
LLC owners that take advantage of pass-through taxation could be subject to Social Security and Medicare taxes, which are also known as self-employment taxes. Sole proprietors and partners pay the same self-employment taxes.
Are LLCs worth it? ›
Without an LLC or other business entity, your personal assets are at risk if your business is sued for something a co-owner or employee does. An LLC's operating structure also helps to avoid conflict and misunderstandings between you and your business partners.
Does an LLC protect your brand? ›
LLCs do not protect business names or brand names. This means that someone could use your brand name and you would not be able to do anything about it with just an LLC. An LLC is just a way to structure a business for legal and tax purposes. You need a trademark to protect a name and stop anyone else from using it.
Can an LLC do a safe? ›
SAFEs – Yes, there are LLCs now doing SAFEs, although the SAFE instrument requires tweaking (like convertible notes) to make sense for an LLC. Even for C-Corps, we still see SAFEs being used only in a limited number of cases (again, because we serve companies outside of California, where SAFEs dominate).
Does an LLC protect your logo? ›
While having an LLC provides some level of protection for your business, it does not give you any exclusive rights to your business name or logo. This is where registering a trademark becomes an essential part of anybody's business.
