A Limited Liability Company is a business structure that combines pass-through taxation of a partnership with the limited liability of a corporation. That means profits and losses pass through to the owners. LLCs offer protection from personal liability for business debts, and owners typically risk losing only on what they have invested in the LLC. For this reason, this entity is often considered a “best of both worlds” approach.
Whether you’re looking to form an LLC or already have one, here are a few tips for managing and protecting your assets.
Protect Your LLC With Insurance
An LLC will often protect the owners (members) from the debt of the business. An LLC, however, will not limit the liability of a member for his or her own negligent act(s). A good insurance policy will often protect the company and the members when the LLC will not.
There are 3 types of liability insurance:
- General Liability Insurance- This policy will help take care of medical expenses, legal defense costs, and judgements/settlements.
- Professional Liability Insurance- This policy can cover alleged or actual negligence, defense costs, personal injury, and copyright infringement.
- Product Liability Insurance- This policy provides coverage if the product causes injury or property damage.
Avoid Mixing Personal & Business Assets
All paperwork, such as contracts and invoices , should have the name of the LLC name on them – not the name of a member. With this approach clients will know that they’re dealing with the business and not an individual.
Members of the LLC should also make sure to create a strong separation between personal and company financial matters. The business should have its own bank account and credit cards, linked to a federal tax identification number. Establishing and building business credit can be just as important as building personal credit.
Here are some steps to begin establishing credit:
- Obtain an Employer Identification Number
- Establish new lines of credit under the LLCs name
- Establish a business phone number.
Maintain Corporate Records
When an LLC is sued, a savy lawyer may chose to simultaneously file suit against one or more individual members , attempting to “pierce the corporate veil.” Maintaining the proper corporate records helps protect the personal assets of members who may be sued in these instances. Failure to properly document the finances and decisions of the LLC may cause a Court to disregard the existence of the LLC for purposes of the lawsuit. This outcome would be detrimental to the LLC’s members.
As an additional plus, maintaining good records can also assist if the members ever attempt to sell the business. A purchaser will want to evaluate the company’s past performance and record keeping. Failure to keep proper records may scare off a purchaser.
Want more information on managing and protecting a LLC? The lawyers at Stanko, Senter, & Mitchell will be pleased to assist you at anytime!
