Did you know that the limited liability company provides two types of liability protection? The corporation only provides one type. Learn about how you can protect yourself and your business when you set up an LLC. best registered agents in Texas
PERSONAL LIABILITY PROTECTION
The main reason business owners set up an LLC for their business is to protect themselves and their personal assets from being lost due to business obligations and lawsuits. The LLC protection laws basically state that an owner of a limited liability company is not personally liable for the debts, obligations and lawsuits of the business merely because he or she is an owner.
Without the use of a limited liability entity such as an LLC, the owners would be personally liable for all such liabilities. Given the number of lawsuits filed today and that we have a litigious society with too many predatory litigation attorneys, this protection is necessary to reduce the risk of starting a new business.
This LLC protection is the same sold protection offered by the corporation entity but the great thing about the limited liability company is that when you set up an LLC, you are not required to meet the same formalities and number of requirements as a corporation in order to gain this protection. The limited liability company is easier to maintain.
BUSINESS LIABILITY PROTECTION
What many business owners do not know is that a limited liability company also provides what it known as reverse liability LLC protection which protects your business assets from your personal liabilities and obligations.
Under the LLC laws of most states, there is a provision called a Charging Order Provision. This provision basically states that a creditor or person who obtains a judgment against an owner personally, cannot foreclose on his or her LLC interest and take over control of the business.
This protection is not offered by corporations. Let me give you an example of the power of this business liability protection.
Let’s say you were driving to the grocery store one day and were at fault in a horrible car accident. The case when to court and you were found liable for an amount greater than what is covered under your automobile policy.
If you were a shareholder in a corporation business you ran, the person you are liable to could file an action which would allow them to take over your shares of stock and take over your business. In most events, they may liquidate your business or sell it to someone who would pay value for it. The creditor is looking to extract money from these assets to pay for the judgment.
On the other hand, if you were an owner (called a member) of a limited liability company, and the creditor did the same thing with your LLC interests, the charging order provisions prevent the creditor from coming in and taking control over the business. You will still control and be able to manage the business.
What the creditor does get is merely the rights to be given any profits distributed to you from the limited liability company. Here is the great thing. As the manager, you can decide not to distribute any profits and to reinvest them in the business. In this case, the creditor gets nothing.
But, this reverse LLC protection gets even better. If the limited liability company business were profitable and the profits got reinvested, a creditor who forecloses on the LLC interest not only gets no cash, but then is stuck with the tax liability allocated to your LLC interests. Given this potential scenario, a creditor will almost never try to take over the ownership interests of a member. This results in your business and its assets being protected from personal creditors.