If you’re an entrepreneur and considering forming a business, you may wonder “Does an LLC protect your personal assets?” The short answer is “yes, it does” in most cases. An LLC is a particular business structure that offers the liability protection of a corporation while giving you the flexibility of a partnership. That’s why so many entrepreneurs choose an LLC as their corporate structure.
By forming a limited liability company (LLC), you and any other members of the LLC generally cannot be sued and held personally liable for debts incurred by the business. This means that your personal assets – such as your house, real estate, vehicles, investments, stocks, and financial portfolio – are out of reach of the LLC’s creditors or disgruntled clients, in most instances.
Unlike a sole proprietorship or a partnership, an LLC is an entirely separate legal entity from its owners. For this reason, creditors can generally only go after assets that belong to the business itself, not those assets personally owned by the LLC’s executives. Asset protection by an LLC is not absolute, though, because there are certain instances when your assets may still be at risk. We’ll discuss this in greater detail below.
In addition to protecting personal assets, there are additional advantages to an LLC in Texas including:
- Simple formation and maintenance
- Tax benefits
- Business name protection
- Flexible profit choices
- Few record keeping requirements
- Flexible management and ownership
- Lower registration fees.
The Texas Secretary of State offers a wealth of information and resources about small business formation and support. The website is worth perusing to find out more. If you need help forming an LLC in Texas, speak to a skilled and experienced business lawyer at Weisblatt Law Firm. Call us at (713) 666-1981.
Creating an LLC for personal assets
A business attorney explains asset protection with an LLC.
To protect your personal assets from business creditors and lawsuits, an LLC might be the right corporate structure for your enterprise. By creating a separate legal entity for your business activities, this provides you with an arms-length protection from those business liabilities, in most cases.
LLCs are popular because typically a member’s financial exposure is limited only to their equity investment in the LLC, and personal assets are not at risk. However, there are some exceptions when personal liability does exist with an LLC, and an owner’s personal finances are at risk. These include:
- Making personal guarantees and/or contracts
If an LLC member personally guarantees a business’s loans or obligations, he or she will be held liable for any default.
- Committing negligence
An LLC won’t protect a member who commits a wrongful act or is negligent in a way that results in harm to another person, such as fraud or assault.
- Paying for environmental clean-up
Using an LLC to purchase or sell a piece of real property does not protect members from liability for environmental clean-up on the property if toxic chemicals or other hazards are present. The U.S. Environmental Protection Agency (EPA) through its Superfund Law (formally known as the Comprehensive Environmental Response, Compensation and Liability Act – CERCLA) imposes strict joint liabilities for clean-up costs.
A closer look at LLC advantages
There are several advantages to an LLC in Texas in addition to asset protection. Read on to learn more about the benefits.
Simple Formation and Maintenance
There’s a whole lot less paperwork involved in starting an LLC than, say, a corporation in Texas. For an LLC, you must only file a Certificate of Formation; and if you want to, you can also file an Operating Agreement. Beyond this, you only have to file an annual report once a year. It’s that simple.
An LLC’s profits are taxed on a member’s personal tax return (Form 1040), which means that you avoid the “double taxation” of a corporation. The profits are taxed only once at your personal income tax rate. This is sometimes referred to as “pass-through taxation,” and it can provide a significant financial benefit. An owner of an LLC can also deduct operating costs, business expenses, and equipment depreciation from an LLC’s tax liability.
Business Name Protection
When you register your LLC with the Texas Secretary of State’s office, this ensures that the business name you’ve chosen cannot be used by someone else in the state. This helps avoid name confusion with other enterprises and ensures that you’re free to build your brand.
Flexible Profit Choices
Texas does not have a business tax, so your LLC will not have to pay state taxes. Texas law allows LLCs to choose a federal tax structure that is similar to a corporation or a partnership.
Few Record Keeping Requirements
An LLC is not required to keep minutes at meetings or publish shareholder information like corporations are often required to do. This cuts down significantly on administrative tasks and maintaining business records.
Flexible Management and Ownership
An LLC can be managed by the owners themselves or by a management team hired by owners to run the day-to-day operations of the business. This type of flexibility is attractive to many entrepreneurs launching a start-up. An LLC also offers flexibility when one or more owners want to sell their stake in the business.
Lower Registration Fees Than a Limited Partnership
To register an LLC in Texas, it costs roughly $300 for a one-time registration fee. This is modest compared to registering a partnership, which can cost $200 per partner or $750 in total and must be renewed annually.
Additional levels of protection
How can an LLC protect your assets?
It’s important to follow Texas law closely to make sure you get the maximum liability protection possible from your corporate structure. That’s where an experienced business attorney can help. Following are some actions you can take to ensure your assets are protected by your LLC:
- Keep the LLC completely separate – Too many owners commingle funds with personal accounts or use business funds for personal expenses. This can open the door for a creditor to seize your personal assets.
- Make sure you have adequate insurance – Though you never expect to make mistakes or get into a legal dispute, it can happen when you least expect it. If your actions result in a legal claim and you do not have insurance to cover the judgment, your personal money may be at risk to pay off the judgment. An attorney can advise you of proper levels of insurance for your type of business
- Think about forming a trust – Trusts are a legal tool that can protect your personal assets from seizure for issues that arise from your LLC.
Texas LLC Requirements
If you’ve decided to move forward with creating an LLC, it’s important to know which items you will need to complete the process. Texas has five basic requirements to form an LLC. These are:
- Having a unique name that indicates the company is an LLC
- Having a registered agent for legal documents
- Filing a certificate of information with the state
- Creating an operating agreement as to how the company will be run
- Getting an EIN for tax purposes.
Speak to an experienced business lawyer today
Making decisions regarding your LLC or another type of business structure can be stressful and confusing. It is always a good idea to have a skilled attorney on your side who can provide sound advice no matter what type of legal issue your business is facing. Experienced Houston LLC attorney Andrew Weisblattt can advise you on a wide variety of legal issues, from asset protection to contracts to business formation. If you have questions about creating an LLC or are facing any other legal challenge, do not hesitate to call our office at (713) 666-1981 today. We look forward to talking to you.
Attorney Andrew Weisblatt
Mr. Weisblatt has practiced continuously since becoming licensed in 1992 and has represented businesses ranging in size from one person start-up ventures to multi-national corporations employing hundreds of people in multiple countries. From 2005 through 2009 Mr. Weisblatt was in-house counsel and chief operating officer of a multi-national corporation in the steel products industry. That in-house position provided valuable insight into how businesses work and what they actually need from their lawyers – both in-house and outside counsel.