An LLC may be costly to start, but a lawsuit would cost more.
A limited liability company (LLC) is the right structure for many businesses. It provides necessary protections for founders and partners, while creating the right amount of flexibility for managing the business.
Protecting personal assets from business creditors is typically the prime motivation to go for an LLC. LegalZoom breaks it down this way: "If an LLC is forced into bankruptcy, then the members will not be usually required to pay the LLC's debts with their own money. If the assets of the LLC are not enough to [cover] the debts and liabilities, the creditors generally cannot look to the owners for payment. Their debt was with the LLC, not the people that owned the LLC."
An LLC creates a separate legal entity that bears the responsibility for its own legal obligations. The members are legally separated from the LLC itself. While they typically are not responsible for the LLC's obligations and debts, there could be exceptions.
This LegalZoom article outlines some of the concerns of asset protection strategies. For example, "If someone files a lawsuit accusing you of wrongdoing – whether it's negligently maintaining your building, wrecking the company van or defrauding a customer – your LLC won't protect you from personal liability. And the judgment in a personal injury lawsuit can be financially devastating."
NOLO recommends that those forming an LLC make sure to properly run the business as an independent entity. Running the organization as a bona fide independent business ensures that a court won't find you've mixed personal and business interests. Courts want to ensure a business is legitimate; otherwise, owners could be held personally responsible for certain liabilities or debts.
Ways to protect your assets with an LLC
LLC records and financials should be kept up to date. Invoices, purchase orders and other key financials shouldn't mingle with any personal finances. For anyone you do business with, it should be clear they are dealing with a separate entity from your personal engagements.
Appropriate levels of insurance are also critical. Business owners should assess their liabilities and risks and find the right level of liability protection. Your industry associations will be a good place to find recommendations for ensuring you have the right level of coverage. While the cost of premiums is one thing to consider, it pales in comparison to a costly lawsuit.
An LLC is often the best legal route for those wanting to establish a business with a good set of protections for their assets. Be sure to consult with the experts and determine if it has enough advantages over other business types to make the best move.