An LLC is a legal business structure that separates the owner’s personal assets from the business’s liabilities, protecting personal property like a home or bank accounts from business debts and lawsuits. This is known as “limited liability” and is one of its main benefits, though it does not protect against personal wrongdoing like fraud or professional negligence.
Protections provided by an LLC
Personal asset protection: An LLC creates a separate legal entity, so the business’s debts and legal obligations are distinct from the owner’s personal finances. This means creditors can generally only go after the company’s assets, not the owner’s personal assets.
Protection from business debts: If the business is sued or accrues debt, the owner’s personal assets (like their house or car) are shielded from being used to satisfy those debts.
Credibility: Forming an LLC as an official entity with the state can boost business credibility compared to a sole proprietorship or partnership, which lack a formal filing process.
Limitations of LLC protection
Piercing the corporate veil: If an LLC is not properly managed or is used to commit fraud, a court can disregard the separation between the business and its owner, holding the owner personally liable.
Professional negligence: An LLC does not protect against personal liability for professional malpractice or negligence. For example, a doctor or lawyer is still personally liable for their own professional mistakes, notes SmartAsset.com.
Personal guarantees: An LLC does not protect against debts for which the owner has personally guaranteed them, such as a personal guarantee on a business loan.
Business insurance: To provide further protection, it is recommended to carry appropriate business insurance to cover risks like accidents or injuries, as mentioned by Block Advisors