When a Limited Liability Corporation Does Not Limit Liability

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While the primary goal for some in creating a Limited Liability Company is keeping personal liability for assets and property away from litigation, this is not always possible. If the owner is responsible for direct incidents or issues, he or she may be targeted individually.

If there are other problems the owner or partner of an LLC has accomplished but are part of the company, he or she may be forced to pay back or compensate. There are many different situations where this person is liable even with an LLC behind him or her. It is important to consult with a lawyer when building this type of business to understand what personal liability still exists.

Company debts and taxes are often the most possible issues that could and do bypass the limited liability that an LLC provides for the owner or partners. When the individual has not paid the correct amount of taxes or has collected debts such as loans or liens, he or she may be responsible in paying them back to the point that his or her personal assets are targeted to ensure that the payments are made and the money collected. It is vital that the person in charge of or that owns an LLC provides the necessary funds for the LLC taxes and any other applicable fees.

The Separate Entity

Forming an LLC creates a separate entity apart from the owners or partners. This protects the personal assets of the individual and the business may own its own assets, become part of contracts and may accrue debts that the company is liable in paying. When the LLC itself is unable to pay creditors for debts or lenders for loans acquired, these creditors and lenders usually only have the ability to go after the company and not attack the personal assets of the owner. However, in very specific situations, it is possible to ensure the personal funds or other assets of the individual in charge of the LLC are used and he or she is held accountable for paying off these debts.

Personal Guarantee for Debts and Business Liabilities

If the owner or partner of an LLC cosigns on a business loan or he or she has provided personal guarantees that he or she will be as responsible for paying debts and business liabilities, the owner or partner is then just as accountable for LLC debts, liabilities and loans that must be paid back. This means that a personal guarantee similar to this transfers liability to the individual so that lending agencies are able to seek the personal assets of the owner if business loans or debts are in default. For some, this may be the only way to acquire a loan for funding a new business or expanding to new territory.

Property as Collateral

One of the most important aspects of personal liability that an LLC owner may not realize is that he or she may be losing his or her collateral if he or she defaults on loans or must pay other debts. The owner’s personal collateral such as a home, vehicles or other property could be used to initially obtain a loan or mortgage on a building for business. No matter if the LLC shields the assets of the individual when created, these pledged items may be seized if a creditor is not paid when complications arise. This means that the owner may lose his or her home if the business is not viable and is unable to accrue revenue enough to pay debts.

Seizing Personal Assets and the Business Lawyer

It is possible for a creditor or financial lender to seize the personal assets of a business owner of an LLC if the courts pierce the veil of the corporate organization. This may transpire if certain corporate formalities are not adhered to such as shareholder meetings and minutes being held, if the owner has too much control over the LLC, if funds are comingled between the owner and the company and if the stipulations in creating the company are not completed properly. One last complication that could lead to the personal assets of the owner being seized is fraud. If he or she is personally involved in fraudulent activity, the LLC protections of liability may be bypassed.

No matter which stage of the business the owner is in, it is imperative he or she has a business lawyer to back him or her. If personal assets are targeted, a business lawyer should be used to assist with legal matters.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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