Forming a limited liability corporation (LLC) is one of the first steps many business owners take to separate their personal assets from their company’s assets. In some ways, this separation of assets helps entrepreneurs avoid personal liability for business-related incidents, debts, and legal cases. However, the sense of safety afforded by an LLC may be misleading. Many people with interest in a limited liability corporation could benefit from additional asset protection.
What LLCs Do and Do Not Protect
Most LLCs are formed to establish a business entity legally separate from its owners. When a limited liability corporation cannot pay its creditors, they can pursue the LLC’s assets. However, creditors cannot demand that the LLC’s owner(s) use their personal funds, real properties, or possessions to compensate for any outstanding debts.
However, the protection offered by an LLC’s segregation of business liability and individual liability is illusory. When you form an LLC, you protect yourself from inside liability or liability resulting from business operations. But maintenance mistakes, hiring mishaps, and other accidents can cost an LLC big.
Furthermore, a business owner who doesn’t maintain proper separation between their personal and business interests can be accused of “piercing the corporate veil”—and be held to account for their company’s mistakes, debts, and labilities.
If an LLC’s facilities, services, and assets are not properly managed, then the owner can still be targeted with a personal lawsuit. This is called outside liability since an LLC may still suffer financial penalties as a consequence of owner negligence.
While Arkansas’ outside liability laws don’t let creditors or individuals seize ownership in an LLC, they can still obtain a charging order against it. When an Arkansas court issues a charging order, they allow the plaintiff in a civil case to place a lien on a limited liability corporation’s distributions or other proceeds. Depending on the size of a judgment, as well as the size of business operations, this can have a devastating impact on an LLC.
How Additional Asset Protection Can Help
Additional asset protection planning can help protect entrepreneurs from overzealous creditors, malicious consumers, and encroaching business partners. An asset protection planning attorney can help you devise and implement appropriate strategies, including:
- Increasing insurance coverage. You may need to buy more insurance or alter your existing coverage if you’re in a high-risk industry, trade, or location.
- Shift assets to a trust. Moving personal or business assets into appropriate trusts can help buffer the separation between them.
- Invest wisely. You may be able to transfer business proceeds into certain accounts which are protected, or better protected, from creditor claims and litigation.
Additional asset protection increases the distance between your business and personal assets, affording more safeguards in case you are taken to court.
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