Generally speaking, the reason for forming an LLC is to obtain some protection from unlimited liability. And part of the reason that LLCs have become so popular in recent years is that they generally do a fairly good job of providing such protection.
That said, the limited liability provided by an LLC is not perfect. So it’s essential to determine whether or not the protection afforded by an LLC will be beneficial for your particular situation.
Rather than attempting to explain all the situations in which operating your business as an LLC would protect you, let’s just cover the types of situations in which having an LLC would not protect you from personal liability. It’ll go much faster that way.
Signing Personally for Business Debt
If the owner of an LLC personally signs for a loan for the business, the lender will be able to hold the LLC owner personally liable for payment of the debt, regardless of the fact that the business is an LLC.
Of course, the obvious lesson is to do everything possible to avoid personally signing for a business loan. Unfortunately, if your business is new, it’s very likely that creditors will be unwilling to loan you a large amount of money unless you are willing to be on the hook for it personally.
Liability Resulting from Services Performed by the LLC Owner
Usually, if an owner of an LLC performs a service for a client, the client will be able to hold any of the owners personally liable for any damages caused by the service performed.
EXAMPLE: Karen, Christopher and Kyle are the owners of an LLC. They provide networking services for local businesses. One day while setting up a wireless network at a client’s office, Kyle accidentally causes the client’s network (and self-hosted website) to crash.
Because Kyle is one of the LLC’s owners, the other business would be able to sue Kyle, Karen, or Christopher for the damages resulting from Kyle’s mistake. However, if the person who had made the mistake wasn’t one of the owners, but was simply one of their employees, the client would only be able to sue the LLC for the damages, rather than being able to sue the LLC’s owners directly.
Simple Summary
- If you end up signing personally for a business loan, you’re going to be held personally responsible for its repayment, regardless of the fact that your business is an LLC.
- If an LLC’s owner performs a service that results in a lawsuit, any of the LLC’s owners can be held personally liable.
For More Information, See My Related Book:
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LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less
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- The basics of sole proprietorship, partnership, LLC, S-Corp, and C-Corp taxation,
- How to protect your personal assets from lawsuits against your business,
- Which business structures could reduce your Federal income tax or Self-Employment tax,
- Click here to see the full list.
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