LLC Asset Protection

What does an LLC protect you from?

**Short Answer: Set up a Legal Entity for your business so your personal assets are not at risk of being used to cover business debts and liabilities.**


Video Transcript:

It’s important to set up a legal entity for your business so your personal assets are not at risk if your business gets sued. In this video, I will explain why. As entrepreneurs, we’re often told to think big and move fast. Thinking big is important to success, but moving too fast can often be dangerous, especially in the beginning. Many new entrepreneurs jump into their business way too quickly, overlook important details, and then they make costly financial and legal mistakes. These mistakes could seriously jeopardize the long-term success of your business. The biggest newbie mistake is not setting up a legal entity for your business. If you don’t create a legal entity, the law will view your business as a sole proprietorship, if there is one owner, or a partnership, if there are two or more owners. Both a sole proprietorship and a partnership leave your personal assets exposed. If a sole proprietorship or partnership is sued, the owner’s personal assets, like their home, cars, bank accounts, etc., are at risk of being used to settle business debts and liabilities. What are the options you have for setting up a legal entity? The most common legal entities that people know of are LLCs and corporations, but before we get in the details, it’s important to first understand their foundation. Let’s discuss what a legal entity really is. A legal entity is the same thing as a business entity, and we’re going to jump back and forth between the two terms in order for this discussion to make more sense. In the eyes of the law, a business entity is a legal person. In the eyes of the law, you and I are natural persons. A natural person is a living, breathing human being that functions independently and makes decisions on their own. A legal person only functions through the work and actions of natural persons acting on its behalf. A legal person is considered by law a separate and distinct ‘person’ from its owners. This separation creates a protective wall between your assets and the assets of the business. Therefore, this keeps your personal assets safe, if your business was to be sued. Think of a natural person as a regular human being, like you and I. Think of a legal person as a corporation like Microsoft or IBM, or even companies like your local grocery store or bike shop. Although a business entity is not an actual, living, breathing person, it still shares many of the same rights and responsibilities as you and I do. It can make money, it can own property, like real estate, boats, aircraft, enter into contracts and agreements, open bank accounts, it can sue and be sued, and pay taxes. Basically, the only thing a legal entity can’t do is vote in an election, run for political office, or do laundry. By setting up a legal entity, you are creating a business organization that can interface with customers, clients, vendors, and more, and, most importantly, by setting up a legal entity, you are keeping your personal assets safe. In the event of a lawsuit, creditors can only go after the assets of the legal entity, and that’s all they can get; they cannot get to your personal assets. Personal liability protection is the number one reason that people set up business entities. The two main types of business entities that people form are LLCs and corporations. We compare these entities in more details in our ‘LLC vs Corporation vs Sole Proprietorship’ video.

As entrepreneurs, we’re often told to think big and move fast.

Thinking big is very important to success…

But moving too fast can often be dangerous.  Especially in the beginning.

Many new entrepreneurs jump into their business way too quickly, overlook important details, and then they make costly financial and legal mistakes.

These mistakes could seriously jeopardize the long-term success of your business.

#1 Newbie Mistake

The biggest “newbie” mistake is not setting up a Legal Entity for your business.

If you don’t create a Legal Entity, the law will view your business as a Sole Proprietorship (if there is 1 owner) or a Partnership (if there are 2 or more owners).

Both Sole Proprietorship and a Partnership leave your personal assets exposed.

If a Sole Proprietorship or Partnership is sued, the owner’s personal assets (home, cars, bank accounts, etc.) are at risk of being used to settle business debts and liabilities.

So what kind of options do you have for setting up a Legal Entity?

The most common Legal Entities that people form are LLCs and Corporations.

But, before we get into the details, it is important to first understand their foundation.

Let’s discuss what a Legal Entity really is…

Legal Entity/Business Entity

A Legal Entity is the same thing as a Business Entity, and we’re going to jump back and forth between the two terms in order for certain paragraphs to make more sense.

In the eyes of the law, a Business Entity is a “Legal Person”.

In the eyes of the law, you and I are “Natural Persons”.

A Natural Person is a living, breathing human being that functions independently and makes decisions on their own.

A Legal Person is only functional through the work and actions of Natural Persons acting on its behalf.

A Legal Person is considered by law a separate and distinct “person” from its owners.

“Protective Wall”

This separation is what creates a “protective wall” between your assets and the assets of the business…therefore, the LLC keeps your personal assets safe if your business was to be sued.

Think of a Natural Person as a regular human being like you and I.

Think of a Legal Person as a Corporation like Microsoft or IBM, or even companies like your local grocery store or bike shop.

Although a Business Entity is not an actual living, breathing person, it shares many of the same rights and responsibilities as you and I do.

What Can a Business Entity Do?

– make money
– own property (such as real estate, boats or aircraft)
– enter into contracts and agreements
– open bank accounts
– it can sue and be sued
– pay taxes

Basically, the only thing a Legal Entity can’t do is vote in an election, run for political office, or do laundry.

By setting up a Legal Entity, you are creating a business organization that can interface with customers, clients, vendors and more.

Safeguarding Your Assets

And most importantly, by setting up a Legal Entity you are keeping your personal assets safe.

In the event of a lawsuit, creditors can only go after the assets of the Legal Entity, and that is all they can get…

They cannot get to your personal assets.

Personal Liability Protection

Again, personal liability protection is the #1 reason that people set up a Business Entity.

If you don’t create a Business Entity, the law will view your business as a Sole Proprietorship (if there is 1 owner) or a Partnership (if there are 2 or more owners).

Neither a Sole Proprietorship or a Partnership will protect your assets.

Remember, if a Sole Proprietorship or Partnership is sued, the owner’s personal assets are at risk of being used to settle business debts and liabilities.

If you first create a Business Entity and your business is sued, then the courts can only go after the assets of the business (not your personal assets).

Forming a Business Entity creates a “shield of protection” between your business and your personal assets.

The two main types of Business Entities that people form are Corporations and Limited Liability Companies (LLCs).

We compare these in more detail in the “Sole Proprietorship vs. LLC vs. Corporation” section.

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Matt Horwitz
Founder & Educator at LLC University
Forming an LLC shouldn't be so complicated. Our step-by-step guide will make the process a breeze – and no complex legal jargon! We teach people how to form an LLC for free in all 50 states. We hope you find our free guides and resources helpful in your entrepreneurial journey.

11 Comments

  1. Scott November 7, 2017

    I filed my LLC name but don’t have plans to start a business yet, was that a mistake?

    reply
    • Matt Horwitz November 8, 2017

      Nope, not at all. This is very common. Just speak with an accountant in case you have to register/file with your state’s Department of Revenue (or similar body). There is a chance you may need to file a return, but it’s also likely that it’ll just be “zeroed out” if there is no business activity. Hope that helps.

      reply
  2. Liz March 26, 2018

    I already have a resale license in my state. I did it under sole proprietor.
    Now I want to form an LLC. Should I redo my resale? Is it included with
    the LLC? I’m not sure what to do. After watching your videos (very informative) I know I don’t want to be sole pro. any more.
    Help!

    reply
    • Matt Horwitz March 26, 2018

      Hi Liz, the resale license is not included with the LLC. Yes, you’ll either need to apply for another resale license or you may be able to transfer the license from yourself to your LLC (after your LLC is formed). Please call the office that issued your resale license and see if they have a “transfer”. Hope that helps.

      reply
  3. dave Costanzo April 18, 2018

    Hi Matt

    How are you

    Great site, best site ever seen about LLC in all states, keep up the good work.

    Had question about what state you think is best for a Parent LLC to be formed it. You stated in one of your videos that you thought a parent LLC in Wyoming is the most popular.

    Can you tell me why you think that Wyoming is so popular as a parent LLC? I heard this too, but thought it was all marketing.

    Does Wyoming have anything different then other state for privacy concerns

    I wanted to hear the reasons from you because your a straight shooter and I know your not selling or marketing something. If you were doing up a parent LLC what state would you do it in?

    Matt thank you for your time, keep up the great work on this site

    Dave
    Chantilly, Va

    reply
    • Matt Horwitz April 21, 2018

      Hey Dave, thank you for the kind words! Wyoming has strong asset protection statutes when it comes to charging order protection, for both multi-member LLCs and single-member LLCs (which is not the case in all states). Specifically, a charging order is the sole remedy for a judgment creditor. In other states, a judgment creditor can foreclose on your LLC interest and take over the LLC. In Wyoming, they’d only receive the right to a distribution (if there is a distribution). I know there are other aspects of the Wyoming LLC Act to consider, but our team has not fully researched them. At some point we’ll take a more comprehensive look and publish something on our website. In addition to Wyoming, I also know that Nevada, Delaware, Alaska, and South Dakota have strong statutes, however, the nuances and the pros and cons would be best discussed with a few attorneys. Hope that helps.

      reply
  4. Craig April 30, 2018

    I’m planning on setting up an LLC in California, and then having multiple DBA’s under that. Is that ok to do, and if so when using DBA names (for different products or services) legally do I have to also indicate LLC name?
    thanks.

    reply
    • Matt Horwitz April 30, 2018

      Hi Craig, yes, an LLC can have multiple DBAs. In any legal context, you’ll need to include the entity name as well as the DBA. Hope that helps.

      reply
      • Craig April 30, 2018

        thanks Matt

        reply
  5. Haydn Powell May 20, 2018

    With regard to personally owned vacation homes and occasional short-term rental through a LLC: Can a LLC provide a “rental service” to a sort-term vacation renter and “procure the service” from the owner of the property. Hence, avoiding the need for the LLC to own the specific property asset? My property has a personal mortgage in my name and I imagine it will be a challenge to get a business mortgage. What are your thoughts on this?, or is there no way to separate the rental business from my personal affairs unless the LLC “owns” the property?

    reply
    • Matt Horwitz June 17, 2018

      Hi Haydn, likely no, since the party sued is the property owner, in addition to management, if suing party legal counsel believes they are also at fault. I recommend looking into a quitclaim deed and speaking with a few real estate attorneys. If advisable for your situation, a quitclaim deed allows you to keep the mortgage in place, but shift ownership of the property from yourself to your LLC. Hope that helps.

      reply

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