Am I Protected From Liabilities Under an LLC?
A limited liability company (LLC) is a business entity that protects owners from personal liability. However, limited liability is not absolute. There are still circumstances in which an owner may be personally liable for outstanding debts.
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Limited Liability
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Generally, when an LLC is unable to pay a debt, the creditor who is owed can only collect from business assets. The creditor cannot satisfy the debt by trying to obtain personal assets. The only personal funds an owner may lose are those invested in the LLC.
Personal Guarantees
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One situation where an LLC owner may be liable for a debt is if he signed a contract with a personal guarantee. For example, if the LLC is a new business with insufficient credit history, a bank offering a loan or a landlord leasing space may require a personal guarantee. This means that if the LLC defaults on payments, the creditor may collect the owed amount from the owner's personal assets, including a home, car or bank account.
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Fraud and Illegality
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An LLC also opens up its members to personal liability if they commit fraud through the LLC. Other illegal, intentional or reckless conduct by the owner that damages the LLC or harms another individual eliminates limited liability.
Piercing the Veil
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A court will examine whether an owner's personal and business identities have become so commingled that they cannot be separated in which cases may seek to pierce the 'corporate veil' of protection to recover debts.
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