Can a Limited Liability Company Protect its Owners From Lawsuits?

By  //  August 19, 2020

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Limited Liability companies are companies that protect their owners, managers, and the LLC itself from certain types of legal liability.

Limited Liability companies are companies that protect their owners, managers, and the LLC itself from certain types of legal liability.

When you form an LLC, you establish a new business entity that’s legally separate from its owners. This separation provides what is called limited liability protection.

As a general rule, if the LLC can’t pay its debts, the LLC’s creditors can go after the LLC’s bank account and other assets, but the owners’ personal assets such as cars, homes, and bank accounts are safe. This means that a business owner only risks the amount of money he or she has invested in the business.

Protection you get with an LLC 

The main reason owners decide to form an LLC  is to protect themselves from any debts incurred by their business.

If you form your LLC correctly adhering to all the legal guidelines then your personal assets should be well protected.

The members will not normally be held liable for lawsuits against the LLC or be held responsible for contracts that the LLC signs itself into.

If you form part of an LLC just the limited liability corporation is responsible for liabilities or debts incurred by the business, not the managers or owners. The LLC’s creditors may go after the bank accounts of the LLC as well as other property but they can’t go after the owners’ personal cars, accounts, homes, or property.

Liability risks you take on as an LLC owner

Many business owners are under the impression that they cannot ever be held personally liable for actions that were committed by their company.

Although setting up your business as a separate legal entity is definitely a good way to separate the liability of the individual owner, it does not exclude you from personal liability in all situations.

Before you start your business, you should consider the potential liability risks of your business and the protection an LLC will offer you.

The following actions can result in you being held liable:

■ You can be held liable for your LLC’s debts

■ You can be held liable for actions by LLC co-owners or employees related to the business

■ You can be held liable for your own actions related to the business, and the LLC’s liability for other members’ personal debts.

Piercing the veil 

LLCs and corporations basically receive the same treatment in the legal system and liability protection is referred to as the “corporate veil.” 

Piercing the corporate veil can happen when corporate directors and officers are held responsible for a corporation‘s actions.

This means the protection of your LLC falls away and the court can go after your personal assets. An example of this is if money is taken from the LLC and deposited in a  personal savings account, a court can then pierce the corporate veil to find that you’re hiding behind the LLC to avoid personal liability.

Courts can use the principle of “piercing the corporate veil” when the members have been involved in the following illegal activities:

■ If you are negligent, this can be if you are at fault in a car accident while driving a company car.

■ If you act on behalf of the LLC while committing reckless or illegal activities, you could be held liable.

■ If you fail to pay the company’s sales tax, then you can be held personally responsible.

■ If you didn’t actually file the required paperwork and fees your company will not be officially recognized by the state, so none of the legal protection will be put into place.

■ If you participated in fraud an LLC’s owners can be held personally liable.

■ As you can see an LLC is a good way to ensure your personal assets are kept safe, in the event that your business finds itself in debt.

As long as you maintain a clean record and abide by the legal requirements of an LLC, this divide between your personal assets and your business will not be breached.