What is "Limited Liability" in an LLC?

Setting up a limited liability company (LLC) for your business is an important way to protect your personal assets.

However, note the word “limited” in “limited liability”.   Illegal acts such as fraud or willful negligence will still subject the LLC owner to personal liability.

And, owning an LLC won’t stop a financial lender from asking you, as the LLC owner, to sign a “personal guaranty” when borrowing money for your business.

The personal guaranty means that you are putting your personal assets on the line in addition to your business assets. This is the bank’s way of working around the “limited liability” protection that normally would limit access to your business assets only. Lenders require it when the LLC itself has limited assets to serve as security for the loan amount.

Note also that the mere act of registering your company as an LLC is not enough to ensure “limited liability”.

If you don’t avoid certain missteps, your attackers may successfully pierce the limited liability shield to place both your business and personal assets at risk.  The legal jargon for this act is called “piercing the corporate veil”.

Among the most common mistakes made by LLC owners is to use the same checking account for personal and business transactions. This practice provides evidence that the LLC is not really a separate entity, but is one-and-the-same with the business owner.

Another common mistake is to not have business entity records such as articles of organization, by-laws and records of membership interests. It’s best to also have minutes of board and member meetings as well.  If an LLC owner makes a personal loan to the business, it should be documented with a promissory note. When money is withdrawn from the business for the personal use of the owner, the withdrawal should be formally recorded as a disbursement.

Consult a lawyer to review whether you have the proper procedures in place to limit your personal liability. Your personal wealth is an important asset to protect.

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Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305     952-649-9771  www.bwittenburglaw.com   bonnie@bwittenburglaw.com