One of the biggest advantages of limited liability company ownership is the personal asset protection provided by the LLC business structure.
Similar to corporations, the LLC limits your personal liability in case there’s a lawsuit against your business, meaning that creditors are only able to pursue your personal assets in the amount of your investment in the LLC. Without this protection, creditors would be free to pursue your car, home, personal bank accounts, etc.
In order to maintain this crucial layer of protection, you need to keep your personal assets strictly separated from your business assets. In this guide, we’ll discuss the nine steps you can take to maintain this separation of assets, and ensure your limited liability protection remains intact.
What Is Personal Asset Protection?
Owners of a limited liability company enjoy personal asset protection, which shields your personal assets from creditors if there is a successful lawsuit (or settlement) against your LLC.
Another phrase for this protection is the “corporate veil,” which is a sort of metaphorical umbrella protecting your assets. If your corporate veil is “pierced” by a court system, your creditors are allowed to come after these personal assets, rather than simply pursuing your business assets.
There are plenty of ways you can ensure the sustainability of your LLC’s personal asset protection, so there’s no reason to be concerned if you’re following all of the relevant guidelines. If you want your personal possessions and finances to be protected by your LLC business structure, make sure you follow the following steps for separating your assets.
9 Steps to Separating Personal Assets From Your LLC
1) Properly Form Your LLC
In order to have your personal liability limited in the first place, you need to form your limited liability company in compliant fashion. While the exact rules and regulations do vary depending on which state you’re forming your LLC in, for the most part you just need to draft and file a document known as the articles of organization or have an LLC service like Zen Business or LegalZoom do it for you.
The articles of organization include a bunch of basic info about your company, like the names of your owners, the identity of your registered agent, and other such details.
2) Maintain Business Bank Accounts
This isn’t a legal requirement to open or operate an LLC in any state, but we think it’s an absolute necessity regardless. Without question, the easiest way to maintain separation between your business and personal assets is to keep separate bank accounts.
This allows you to keep distinct sets of banking records between these two types of assets, and ensures that you’re not mixing and mingling funds by accident. If you haven’t already done so, opening a business checking account is a must.
3) Acquire a Business Credit Card
Getting a credit card for your business is almost as important as opening a business checking account, and not only because it allows you to separate business and personal purchases.
It’s always nice to have a line of credit for your LLC that enables you to make large purchases that you wouldn’t have been able to otherwise, especially if it keeps you from using a personal card.
4) Insure Your LLC
On an asset protection level, if you use your personal vehicle for business matters, you’ll need to acquire business auto insurance on that vehicle ― your own personal auto insurance will not be sufficient for business use.
Beyond discussions of the corporate veil, not all states have the exact same requirements for insurance coverage, but if you hire employees, your LLC will most likely need workers compensation insurance, as well as unemployment insurance.
5) Keep Detailed Financial Records
Another vital part of asset protection is using accounting software to create a detailed paper trail of each transaction you execute for your business.
The better job you do in keeping financial records, the less likely you are to lose your limited liability protection, because it will be that much easier for you to prove that your personal and business assets are truly separate.
There are many other benefits of practicing good recordkeeping, like simplifying your responsibilities during tax season. It can make it easier to settle potential disputes with your customers or vendors, and it can also help to attract investors because they can look through your detailed books to get an accurate picture of your finances.
6) Adequately Fund Your LLC From the Start
Your limited liability company needs to be funded with enough money to cover its operations from the moment it’s formed, or you could run into problems with your corporate veil.
This is because your business needs to have enough funds to function at all times, or a court could claim that it is not a distinct entity from you as its owner. It’s pretty easy to claim that your business isn’t a separate entity if it doesn’t have enough funding to stand on its own.
7) Sign Documents With Your Company Name
One of the easiest mistakes to avoid when it comes to keeping assets separate is signing your own name instead of your company’s name when entering into a contract, or signing any other form or document.
You should always sign your business name in addition to your own personal name to make it clear that you are signing the document on behalf of your business, thus further establishing that you and your business are not the same entity.
8) Don’t Commit Any Fraudulent Acts
“Don’t commit fraud” may seem like the most obvious statement we’ve ever made, but it’s still worth discussing what exactly this can refer to.
The most common forms of LLC-related fraud are if your business borrows funds that it doesn’t have the means to repay, or if the LLC is spending money it doesn’t have access to ― either of these situations put your personal asset protection in grave danger.
If you find yourself in one of these situations, you can simply make a financial contribution from your personal accounts to your business accounts. As long as you properly document the contribution, this is a much better option.
9) File Annual Reports and Other Maintenance Filings In a Timely Manner
Most states require LLCs to file annual reports which keep the state updated regarding some of the important basic information for your company, and those reports almost always have a fee attached to them. Other states have ongoing franchise taxes which are basically a fee for the privilege of doing business in that state.
Regardless of which state you form your LLC in, it is your responsibility to find out how you’re expected to maintain your business, and to stay current on any maintenance requirements your state may have. These are important steps to further indicate to the state that you and your business are separate entities.
Conclusion
Failing to separate your business and personal assets can lead to a court piercing your corporate veil, which means you’d lose your personal asset protection.
The limited liability company’s ability to protect your personal assets is one of the cornerstones of this business structure, and losing this protection could lead to dire consequences for your finances.
While in theory it might seem that there’s quite a few rules to follow in order to keep your business and personal assets separate, in practice we think it’s generally not too difficult. As long as you keep in mind the pointers discussed in this guide, we’re confident that you’ll be able to keep from commingling your business assets and personal assets.