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 “protects” your personal assets by standing in as a separate legal entity in business disputes and lawsuits. Again, let's return to the example of a business customer suing your company. If their lawsuit is successful, you might be required to pay damages.
Do LLCs actually protect you? ›
If you're an entrepreneur and considering forming a business, you may wonder “Does an LLC protect your personal assets?” The short answer is “yes, it does” in most cases. An LLC is a particular business structure that offers the liability protection of a corporation while giving you the flexibility of a partnership.
Is my LLC protected from my personal debts? ›
General Rule: LLC Isn't Liable for Members' Personal Debts
As a result, the LLC's property can't be taken by creditors to pay a member's debts.
What is the disadvantage of an LLC? ›
LLCs offer several benefits over sole proprietorships and partnerships, such as limited liability and tax efficiency, but come with the drawbacks of potential self-employment taxes and complexities in management and ownership transfer.
How to protect yourself in an LLC? ›
As an LLC owner, here are several potential options to consider that will help lessen the risks to your personal assets from your LLC's business activities.
- Run Your LLC as an Independent Entity. ...
- Buy Appropriate Levels of Insurance. ...
- Elect Corporate Status for Your LLC. ...
- Explore Trusts Options to Protect Assets.
The Top 10 Disadvantages of LLC are listed below.
- Limited liability has limits.
- Self-employment tax.
- Consequences of member turnover.
- Personal liability protection.
- Corporate taxes are usually bypassed.
- Difficult to transfer ownership.
- Self-Employment Taxes.
- Confusion About Roles.
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.
What happens if an LLC can pay back a loan? ›
Although an LLC helps protect your personal assets from liability for business debts, lenders often circumvent this barrier by requiring a personal guarantee. When you sign a personal guarantee, you agree to assume personal liability for repaying the loan if your company cannot make the payments.
Can the IRS take money from my LLC? ›
In most cases the IRS cannot collect on an individual member's unpaid taxes by seizing LLC assets. In the eyes of the law, an LLC is a separate entity from its owners (members).
Does an LLC protect you from the IRS? ›
For state purposes, an LLC is a business separate from its owner in which the owner is protected from the LLC's acts and debts, such as bankruptcy and lawsuits. For federal tax purposes, it is not regarded as separate from its owner, therefore, the owner is liable for the tax liability of the LLC.
The true advantage of an LLC over other business entity types comes in the form of tax benefits. LLCs give business owners significantly greater federal income tax flexibility than a sole proprietorship, partnership and other popular forms of business organization.
Why is LLC better for small business? ›
LLCs protect you from personal liability in most instances, your personal assets — like your vehicle, house, and savings accounts — won't be at risk in case your LLC faces bankruptcy or lawsuits. Profits and losses can get passed through to your personal income without facing corporate taxes.
Why an LLC may not be beneficial? ›
LLCs Can Complicate Investor Tax Situations
Members will be taxed on the LLC's income even if no cash is distributed to you to pay the taxes; The investor's ability to file its own tax return is dependent on receipt of the K-1, and if there are problems with the K-1, the investor could have to amend its tax return; and.
Am I personally liable for LLC debt? ›
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.
Will an LLC protect my personal assets? ›
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 hide who owns an LLC? ›
Set Up a Holding Company. Consider creating a separate holding company that owns the LLC. The holding company's name will appear on public records, keeping the true owner's identity hidden. This strategy adds an additional layer of privacy and asset protection.
Does a single member LLC protect your personal assets? ›
Understanding Liability Protection in SMLLCs
Liability protection in the context of an SMLLC means that the personal assets of the business owner, such as personal bank accounts, home, and car, are protected from claims against the business.
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.
Are LLCs a good idea? ›
The Bottom Line. LLCs are a good combination of protection with flexibility and tax benefits. It provides an array of taxation alternatives while shielding individual members from personal liability.
