Individually owned and closely held businesses are often created as limited liability companies or LLCs, and one of the reasons why this is done is to protect personal assets. These entities exist in a type of gray area between corporations and sole proprietorships or partnerships. The people who own an LLC are referred to as “members,” and the law does allow for single-member limited liability companies.
The members of an LLC gain the benefit of keeping their own personal finances separate and protected. On the other hand, the officers and principal shareholders of corporations that are litigated against can indeed be personally targeted. This is one of the reasons why people start limited liability companies rather than incorporating.
It should be noted that the creation of a limited liability company doesn’t make you completely immune from creditors and other claimants. If someone wanted to litigate against the limited liability company its assets as an entity in and of itself could be attached. In addition to this, a lot of people are going to want to take cash distributions from their limited liability company. If there was a judgment against a member, a charging lien could be placed on these distributions.
Some people think that they can just have the LLC pay their bills in an effort to avoid charging liens. This a bad idea because creditors often make the case that limited liability companies are simply the “alter ego” of their members. If you are trying to contend that your LLC is a completely independent entity, the case is going to seem a bit hollow when the creditors point out the fact that the limited liability company has been paying your mortgage and your car payments.
Limited liability companies can be a useful tool for people seeking asset protection. To explore the possibilities in-depth, arrange for a consultation with an experienced financial planning attorney.