Setting up a limited liability company offers your personal assets similar legal protection to incorporating. Unlike a sole proprietorship or partnership, running your business as an LLC protects your personal assets from business creditors. Even a single individual can form an LLC to protect her assets.
Protecting Your Assets
As the name suggests, an LLC limits your personal liability for the company's debts. A lawsuit can seize your LLC's bank accounts and assets, but not your personal property. Even if the LLC assets aren't large enough to pay the judgment, you aren't affected. Likewise, if the LLC goes out of business, you and your fellow members aren't responsible for the debts left unpaid. There are exceptions to this rule though.
Preserving Your Protection
Your LLC only protects you as long as you take steps to keep yourself and your company separate. If you run a one-person LLC, for instance, it should have its own bank account. If, instead, you pay the bills and deposit the profits in your personal account, a court could decide your company is just a sole proprietorship with no liability protection. If a vendor or lender insists you personally guarantee the LLC's debts, your personal assets are on the line. There's also no protection if a creditor can show you intentionally cheated or defrauded him.
An LLC doesn't protect your personal assets from personal debts, but it does protect your business assets. If a creditor sues you over a personal debt, for instance, the company's assets should be out of his reach. A creditor can go to court for a charging order, a personal lien which lets him claim any money you receive from the LLC until your debt is paid. As the order doesn't force the LLC to distribute any profits to you, that's not much help to the creditor.
A charging order can't give a creditor an ownership stake in the company. If state law allows it, however, a creditor can also go to court to foreclose on your ownership. That gives you and your partners greater incentive to negotiate a settlement. Foreclosing doesn't entitle a creditor to a management role in the business, though. This protects your co-owners from having a new partner forced on them. If you're the only owner, your state law may not shield you as much. Florida, for instance, offers very little asset protection to a single-member LLC, according to attorney Jonathan Alper's website.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.