If you are planning on starting a small business, your business planning should involve not just business, finance and marketing but also protection and liability protection planning.

Small business lawsuits are on the rise and business owners need the liability protection afforded by LLC incorporations more than ever. It is risky to start a business. You now only will be investing your time and your money into a new endeavor but you are also going to be making decisions, entering into contracts and transacting and interacting with a myriad of other people and business entities.

The last thing you want to do is subject yourself to incredible personal liability by operating the business directly. This direct structure is known as a sole proprietorship and it leaves its owners 100% at risk for potentially large liabilities.

The LLC was created specifically to cater to small businesses. State legislatures made them relatively straightforward to form and easier to maintain and operate.

Do not risk your own liability and loss of your personal assets. Complete the LLC incorporation process prior to conducting in any business activity.

A limited liability company is not the substitute for business insurance.

A limited liability company provides personal limited liability protection which prevents an owner of the business from being liable for “business” obligations merely because he/she is the owner. This gives you protection that a sole proprietor does not and is a tremendous benefit because all businesses will have to subject themselves to risk as a necessary component of running a business and small business lawsuits are file all the time.

However, a business LLC is never a substitute for business insurance.

First, business insurance exists to protect the LLC business itself (and assets held by the business) from certain liabilities in case the business is sued. The LLC protection is there primarily to protect the personal assets of the owners from business liability but not the business assets themselves. Insurance can do this.

Second, the LLC protection does not apply to every situation where an owner could be held liable for a business related action. For example, if you are a personally negligent (ex. you were in a company car and were at fault in causing an accident) when running your business, someone can still sue you personally for being personally negligent.

You cannot avoid personal actions liability merely because you own an LLC. Insurance can help to covers some of these situations (accident insurance, professional liability insurance, auto insurance, employment acts, etc.).

The LLC Expert offers a popular ebook- The Six Step LLC Formula for Limited Liability Protection which provides a more detailed explanation of business LLC liability limitations so you can better understand them as an LLC operator and plan for them. There is a section explaining insurance.

The answer to this question really depends on the specific circumstances.

One reason businesses create LLC entities is to avoid member personal liability for business contract obligations by having the LLC sign contracts. However, there are possible situations where a landlord can sue a member of an llc lessor such as situations where the landlord has a personal claim pursuant to the terms of the contract, a member personally guarantees the contract, the landlord seeks to “pierce the LLC veil” or in situations where the landlord feels it has a legal claim against the member individually outside of the lease contract.

If you are just starting an LLC, we recommend you read our Six Step LLC Formula eBook to help reduce the likelihood of personal liability and you should ensure the lease contract obligations only apply to the LLC entity. A lease contract is one transaction where it makes sense to hire a lawyer because they generally are a longer term contract and a relatively significant obligation.

If your LLC is already in an arrangement and is facing issue with the landlord, you should seek the advice of a lawyer to determine the possibility or likelihood of any potential member claims based on your situation. As noted, the answer really depends on specific facts and circumstances such as the specific provisions of the contract, whether the LLC member has done anything outside of the contract, and how the LLC has been operated and maintained.

The answer to this question really depends on the specific circumstances.

One reason businesses create LLC entities is to avoid member personal liability for business contract obligations by having the LLC sign contracts. However, there are possible situations where a landlord can sue a member of an llc lessor such as situations where the landlord has a personal claim pursuant to the terms of the contract, a member personally guarantees the contract, the landlord seeks to “pierce the LLC veil” or in situations where the landlord feels it has a legal claim against the member individually outside of the lease contract.

If you are just starting an LLC, we recommend you read our Six Step LLC Formula eBook to help reduce the likelihood of personal liability and you should ensure the lease contract obligations only apply to the LLC entity. A lease contract is one transaction where it makes sense to hire a lawyer because they generally are a longer term contract and a relatively significant obligation.

If your LLC is already in an arrangement and is facing issue with the landlord, you should seek the advice of a lawyer to determine the possibility or likelihood of any potential member claims based on your situation. As noted, the answer really depends on specific facts and circumstances such as the specific provisions of the contract, whether the LLC member has done anything outside of the contract, and how the LLC has been operated and maintained.

You can minimize risk of personal member liability by following certain rules when conducting business and maintaining sufficient LLC governance formalities including executing proper LLC governance forms.

The LLC laws of every state have a specific liability limitation provision which basically states that a member or manager shall not be personally liable for business debts, obligations or liabilities merely because he is the owner.

This is a very advantageous benefit because without protection, an individual running a business is completely liable for all business related obligations. However, this law is not a license to be able to unlawful things and hide behind a veil of protection.

So, an individual cannot break the law, commit a fraud or do something unlawful and then claim that he or she was only acting on behalf of a limited liability company.

Another important factor that has caused members of an LLC to be liable is when a member conducts business but never lets the other party know that it is a legal entity and not him personally that is engaging in business activity. It is important to always let the world know that it is an LLC operating the business. You are an agent working on behalf of the LLC business.

This is one example of where members may be held personally liable if actually sued. There are a string of other situations where the protection veil of a limited liability company can be pierced. If you would like to learn more about these other situations and what you can do to avoid them, you should read The Six Step LLC Formula to LLC Protection- an eBook offered by The LLC Expert, LLC.

VIDEO LIBRARY

Wondering whether to start an LLC for your new business?

Many think that if the business will only be owned by one person or if the business is going to be small with very little revenue, then the LLC is not required. To the contrary, this is the wrong thinking that has caused many personal liability problems for others.

Listen to this video by Amyli McDaniel which explains how a prospective business owners should assess whether he or she can benefit from the LLC protection afforded by the limited liability company.

I have received a lot of inquiries about whether the use of a limited liability company llc shields a person from having to file for personal bankruptcy if the business is failing and has debts it cannot pay.

The answer to this depends on what you have done in your business.  First, if you had decided to form an LLC when you started your business and then transacted all business in the name of the LLC, then the LLC liability limitation provisions protect you from being personally liable for obligations under those business transactions.  For example, if you signed a vendor contract only in the name of your LLC, then the obligations including any payment ones are those of the LLC not you personally.

In times like these, where both large and small businesses are not making it, those that had formed an LLC are much better off because they are not generally personally liable for any business obligations.  If an LLC business is in dire straits and bankruptcy is the only answer, then it is the limited liability company LLC that files for bankruptcy, not you personally.

Now, if in your business transactions, you agreed to be personally liable for a business debt, this protection would not apply to those deals.  This is because you affirmatively agreed to personal liability for a business debt.

Overall, if you conduct business in the name of the LLC, this is a tremendous benefit of an LLC.  Most people do not think about business failure when starting a business but the LLC protections provide this substantial benefit in the event of a business failure.

Today, a well know legal professor (expert in business organizations law) filed a brief in a landmark Florida case that addresses a fundamental single member LLC matter. If the court agrees with his position, this could mean the definitive end to any charging order protection for the single member LLC.

State LLC laws have never differentiated between a limited liability company that has one member and one that has multiple members when it comes to liability protection.  It is well recognized that every LLC provides a layer of protection stating that owners are not personally liable for business liabilities merely because they are owners.  This is known as forward liability protection.

However, an LLC in most states also offers what is known as reverse liability protection or charging order protection.  This protection basically states that if a member is personally sued for a non-business related obligation and is found liable, the creditors cannot take full ownership of the member’s LLC interest in the LLC.  The creditor’s rights are limited to the economic interests.  In effect, this allows the member to retain the control he had in the LLC business.

The philosophy behind the charging order is not really to give protection to the liable member but to protect other owners of the LLC from business disruption and problems.  They should not fall victim to one member’s personal liabilities by having to deal with an unknown creditor coming in and affecting the business by having management or voting rights.

Now this reasoning does not really apply in a single member LLC context because there are no other members to protect.  A well known bankruptcy court has nullified charging order protection in a single member LLC in the context of a bankruptcy.  While conservative legal practitioners interpreted this ruling to mean there is no longer charging order protection for a single member LLC, the ruling technically applied in only a bankruptcy context.

However, this Florida case addresses the matter in a non-bankruptcy circumstance and so its conclusions will have significant ramifications and applicability in the general area of LLC protection.

More details can be found at this link:

http://www.wmitchell.edu/news/articles/default.asp?articleId=11766&story=Professor-Kleinberger-files-brief-in-landmark-Florida-single-member-LLC-asset-protection-case

This is a tricky question because there is always the interplay between the liability protection afforded to an LLC officer under the limited liability company laws and the general law that requires that you be personally accountable for your actions.

Making decisions in a business is difficult.  You need to decide on things when you may not have complete information and you may make decisions that may ultimately prove to not be the best one.  The law acknowledges this and so generally does not hold an officer or a manager personally liable for the acts made on behalf of the business AS LONG AS the person acted reasonably and did his homework when making such decisions.

This is a standard of care that is imposed on those who run a business which benefits others (like the other members) and the specific standard actually differs based on your state.  Some have a very low standard while others impose stricter requirements.  However, the general concept is that you should “mind the business” when serving in your officer role.

Gather all the available information you need in any business situation and take the time to review it.  Consult with your employees or advisers if need be. Spend the time to think through each business decision and always ask what is in the best interests of the LLC business.  If you maintain this standard and engage in some diligence, the LLC liability protection laws should protect you.

One additional protection you could ask for before serving in an officer role is an indemnity agreement where the LLC business will agree to cover your personal liability if one ever came up.  Another layer of protection is requiring a director and officer insurance policy to cover you.

Now, if you engage in unlawful or illegal conduct or you make decisions that are clearly in your interests but not the interests of the LLC business, you could be found personally liable.

Generally, when this question is asked it is two fold.  One, how are previously purchased equipment or previously incurred debt transferred to a limited liability company when an LLC is created later for a business.

Second, is it possible to not be personally liable for that debt after the transfer?

Question #1:  Yes, you can transfer any assets or debt to your LLC. You transfer assets with a document called a Bill of Sale and you assign debt with an assignment of the debt contract and obligation.  The LLC needs to agree to undertake the debt obligation by having its members formally approve this transaction.  The approval should be documented with a written resolution or consent.

Question #2: No.  Once you personally agree to an obligation, you cannot later get rid of that personal obligation by transferring he obligation to an LLC.  You remain liable.  The only way to change this is to get the other party (e.g., the lender or vendor) to agree to take you off as a liable party. In most cases, that party will never agree to this- it just does not make business sense.

The best approach is to create an LLC early and have your limited liability company be the contracting party or the borrowing entity from the beginning.  Please note that many banks will not lend money to a brand new LLC with no operating or credit history so you may end up being asked to personally guarantee the loan in any event.  Banks are conservative.  It is still worth your LLC being the borrowing entity (Even with the guarantee) as this is how you begin to establish credit for your LLC business.

Learn more about the limited liability company at The LLC Expert.

Most business owners create a limited liability company for their business in order to protect their personal selves and their personal assets from the liabilities and obligations of the business.

However, another liability concern relates to what is known as “reverse” liability. If a business owner is sued in his personal capacity for something totally unrelated to his LLC business, is the LLC business protected from being taken over by the person who obtains a judgment against the business owner personally?

The LLC laws of most states contain a “charging order” provision in them which is a great benefit of owning a business through a limited liability company.

The charging order provisions generally state that a creditor of a member of an LLC can only seize the economic rights of the LLC ownership interest held by that member. In other words, the creditor can never get the full ownership and never have voting or management control over the LLC business. What does this mean?

It means that you, as an LLC owner, will continue to be able to run the LLC business as before, and you, as a manager (along with other managers) can decide not to pay out any profits distributions related to ownership interests. This would result in the creditor not receiving any money for foreclosing on the LLC ownership interest AND actually being liable for the tax related to profits of the LLC business that were retained in the company.

Given this, most creditors will not look to take any LLC ownership interests because the potential result could be that the creditor will have to pay taxes on profits he never gets.

LIMITATIONS OF CHARGING ORDER PROTECTION

While charging order protection provisions are found in most state LLC statutes, an important bankruptcy case held that charging order protection would not apply to single member LLCs. This is because the reason for the charging order is to protect other members of your LLC business and the LLC business itself from business interruption related to the personal liabilities of one of its members. With a multi-member LLC, the interests of a personal creditor of one member should not take precedence over the LLC and the other innocent members.

However, if the LLC is owned only by one member and it is that member who is personally liable to a creditor, then in bankruptcy, the law will ignore the charging order protection and could allow the creditor to foreclose on the entire LLC ownership interest and business. To be safe, practitioners are advising that charging order protection should not be relied upon in any single member LLC situations either within or outside of bankruptcy.

This article discusses charging orders generally, but each state has its own scope and details for charging order protection so if this is an important issue to you, please check with your local attorney to receive specific advice for your jurisdiction and circumstances.

CAN I FORM AN LLC TO GET RID OF EXISTING PERSONAL LIABILITY?

I get inquiries almost daily from people who are dealing with a current problem or lawsuit and they want to know if there is a way for creating an LLC at that point and use the LLC to somehow avoid being liable for the potential liability or lawsuit in question.

The answer to this is always “NO.”  An LLC only exists from the point it is created.  So, if you were to form an LLC today, it did not exist with respect to any business or other activity that took place before today.  While one can transfer liabilities to the LLC and have it be responsible, the transfer does not alleviate the person from being personally liable if he or she was liable in the first place. You cannot get rid of any personal liability by using a limited liability company.

In addition, even if your business was in an LLC, there are some personal liabilities that LLC protection does not reach.  These include those in which you personally agreed to be liable for (such as a loan guaranty or a guaranty to a lease agreement)  or your own negligent acts.  You can never act negligent or in aways that are unlawful and be able to hide behind an LLC.  The law will hold you personally responsible for your own tortious acts.

But aside from the limitations, creating an LLC for your legitimate business activity is always a good idea and sometimes it takes a lawsuit or dispute to open your eyes to these issues.

For example, I had a client once who owned investment property in his own name.  He and his tenant had a dispute about what rent was owed and other issues, and he was personally liable to address all this.  Given that there was a lawsuit in his own name, he had to disclose this in his credit applications and reports and it affected his personal and business life.

While he could not avoid the personal liability for this one tenant and the tine period to date, he could avoid similar issues for future periods by forming a limited liability company and transferring his investment properties into an LLC and his contracts into the LLC name.  Then moving forward, he should have his limited liability company be the business party to his leases and vendor agreements.

It is never too late to minimize future liability potential by forming an LLC using the limited liablity company for your business, but the limited liability company cannot be used to get rid of existing personal liability and it can never be used as an instrument to avoid being liable for misconduct, fraudulent, negligent and unlawful acts you engage in.

The biggest reason that a business owner should and would want to use a limited liability company for his or her business is because the LLC provides a layer of protection between the business and the business owners.  What does this mean?

Most people know what it means generally, but they may not be aware of how it applies and when it applies or does not apply.

Every state’s LLC laws have a provision that says something similar to this (legalese): “. . . no member, manager, organizer or agent of a limited liability company shall have any personal obligation for any liabilities of a limited liability company . . . solely by reason of being a member, manager, organizer or agent of a limited liability company.”

This is a powerful provision.  It means that the business and its liabilities are separate from its owners.  Without an LLC, if you run a business as a sole proprietorship, you are personally obligated for ALL business debts because the business is a part of you.

Let me give you an example.  If you operate a grocery store business as a sole proprietorship and enter into a contract to purchase inventory, you are personally liable to pay for what is owed under that contract.  If instead, it is a limited liability company that is the business and enters into the contract, it is the LLC and not you personally who is obligated under that contract.

Another example:  If you own that store as a sole proprietorship and someone slips and falls and sues- you and all of your assets will be at risk for that lawsuit.  If it is the LLC that owns and runs the store, it it is the LLC and its assets that are at risk for the lawsuit.

So, given this litigious society where plaintiff lawyers are always looking for targets and people sue for almost everything, the benefits of limited liability protection from a limited liability company are so powerful. . . especially given the low costs to form and ease of maintenance.

Now, this protection is NOT ABSOLUTE.  If you are otherwise personally negligent or at fault due to some actions you personally did, then the limited liability company will not shield you from those actions even if you were working in your business at the time.  For example, if you were delivering groceries to a customer via a company truck and you were at fault in having an accident, you will be held personally responsible for being at fault.  So, having a limited liability company is not the substitute for getting business insurance covering your business and its employees.

There are also other limitations where the law feels like due to circumstances, the business owners should be held personally liable. .  areas like when the owners contractually agrees to be pesonally liable, committing a fraud, using the LLC for improper purposes or to purposely avoid an obligation and piercing the LLC veil.

The liability protection afforded by a limited liability company is powerful and definitely worth the benefits but please know there are some limitations (you can learn more details about them in my Six Step LLC Formula for Limited Liability Protection eBook) and you do need to make sure you properly form, operate and maintain your LLC in order to preserve this important benefit.