Establishing your business as a Limited Liability Company, or LLC, is a powerful way to segregate your personal assets from those of the business.
Unfortunately, those protections are not limitless. If you personally co-sign for or guarantee a business loan, you could be liable for that amount in a lawsuit, or if the business fails.
Similarly, if you pledge personally-owned assets – say, your home or stock portfolio – for a business loan, you could be on the hook personally.
But there’s a third threat to LLC protection. It’s called “piercing the corporate veil.” Here, a creditor attempts to show that the LLC is a shell created only to provide liability protection for its members, or the LLC was practically inseparable from or an alter ego of its owners.
Courts will be more likely to pierce the corporate veil if:
- Formalities, such as holding annual meetings and keeping minutes, were not followed.
- Certain members exerted too much control over the LLC.
- Members commingled personal funds with the LLC’s funds or used personal funds to satisfy the LLC’s obligations.
- The LLC was not sufficiently capitalized when it was formed.
Maintaining a wall around your personal assets
- Adopt and follow appropriate formalities. Hold annual meetings of members. Keep accurate, detailed “minutes” of important decisions. And be sure to follow the LLC’s Operating Agreement.
- Never commingle assets. Keep personal and business separate, always.
- Never divert LLC assets for personal use.
- Never tell a creditor you will personally guarantee payment.
- Make sure everyone knows they are dealing with a corporation, not an individual.
Disclosures:
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
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2023-163887 Exp. 10/25 *pre-approved content*