Feeling proud and secured after forming your first Limited Liability Company (LLC) in the US? Do not be since the LLC’s limited liability protection doesn’t offer 100 percent security for your personal assets. You could still be held responsible for the unpaid payroll taxes or loans you guaranteed personally that your LLC failed to pay off.
Scared? Feeling lost?
Do not be. Read along to get some handy tips that will help to minimize risks on your personal assets from your LLC’s debts and financial obligations.
Being an LLC owner is never easy since you’ve to manage employees, deliver projects, boost profits, file tax returns, take care of legal complications, pay off creditors, protect personal assets, and so on. Here are a few surefire tips to ease your task of protecting your personal assets from LLC debts and liabilities.
1. Put your profits into your primary residence: Has your business begun generating handsome revenue? Congrats!!! Your hard work has finally paid off. You’re doing well now.
Put the money into your primary residence since you can save it from creditors to a certain extent through homestead exemptions. Yes, you can use homestead exemptions to safeguard your primary home up to a specific dollar amount. Florida deserves a special mention here since it helps to protect primary residence from financial liabilities, even though the purchase was particularly made to avoid paying off debts.
Asset protection tips actually differ from state to state. For instance, if you’re a resident of Arizona, then you can use these tips to keep your assets away from creditors:
Apart from your home, college saving plans are also protected in several ways from LLC debts under various laws. So, you can distribute the company’s revenue here as well.
2. Operate your LLC as an independent business: You may fail to shield your personal assets if you don’t run the LLC as a purely independent business. Try to have correct and separate financial records for the LLC. Otherwise, the court may mark your company as a scam, and hold you responsible for its debts. Are you prepared to take all the responsibilities? Think twice.
Remember, if you can’t run your LLC properly and fail to fulfill all its financial obligations, then it may lose its protective status altogether.
3. Buy professional insurance: Professional mistakes are unavoidable in a business world. These mistakes can take a toll on your personal assets depending upon the level of seriousness. Therefore, it’s best to buy a professional insurance, and keep protective hands over your assets. You can have a talk with industry experts or professional associations to know about the various types of insurance policies and their coverages. The most important part is to determine how much coverage you need for covering your assets. Dig information about policy exclusions and discount rates as well.
4. Try to avoid personal guarantees: Once you personally guarantee a business loan, you become responsible for making required payments even if the LLC can’t. If you’re new in the business arena, you may have to pledge a big asset as collateral against the loan. This means creditors can take away your assets if and when the LLC defaults on the business loan.
The best way to avoid this scenario is to boost company profits, keep your creditors happy and establish credit in your LLC’s name.
5. Go for the corporate status for your LLC: This will help you protect your personal assets and give you the option to get relief from the liability of unpaid LLC payroll and other significant taxes. But yes, you’ll have to be satisfied with complicated tax filing procedure, reporting, and double taxation that come along with the status of C corporation.
As it has already been said, it is best to keep a small amount in the company since creditors can grab it when your LLC is sued. To minimize risks, you can keep a small amount in the company, and disburse it amongst the rest of the owners.
Make sure you don’t transfer money when a creditor is already waiting for payments. It’ll be considered as a fraudulent transfer.
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