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Oct 19
2015

Avoid Personal Liability for Your LLC

Posted by: Steve Marr

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Many business owners use a Limited Liability Corporation, or LLC, to form a business. This provides the ability to run a business as a sole proprietorship or as a partnership. The LLC provides a lot of protection for the owner from personal liability. However, you need to take some precautions.

 

A critical step requires that you separate LLC business expenses from personal expenses. Some business owners think that because income from an LLC is usually taxed as the owner’s personal income, the owner doesn’t need to separate personal and business expenses. This may be a major error.

The reason this is a problem is that it makes a business owner personally responsible for suits, as much as $250,000, or more. If the owner had only $40,000 in net business assets, the owner might believe that he could just bankrupt the business and expect the balance of the judgment to be written off. If the owner consistently ran personal expenses through the business or ran business expenses through a personal checkbook, courts have held that the business was not really a corporation. Then, the owner’s personal liability sticks. This may come as a painful surprise to a business owner.

I always advise business owners to have one checkbook for the business and a separate checkbook for personal expenses. This helps the business owner to keep track of profit and loss. I have seen many instances where a business stayed afloat because the owner used family budget money to cover business expenses. If you are financing a business from personal funds, be clear about how much you invest. Make sure you don’t keep going forward losing money. By keeping clear books, no matter how simple, you can understand the financial picture better.
John wrote, “Watch out that you do not lose what we have worked for, but that you may be rewarded fully.” (2 John 1:8, NIV) When setting up an LLC, avoid potential liability by separating business funds and expenses from personal finances. This will insure that you don’t lose the protection you wanted from the LLC.

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