Does an LLC Protect You from Personal Liability?
A limited-liability company (LLC) generally protects against personal liability. This is an important reason why business owners create LLCs. If asset protection isn’t a priority for you, it probably should be.
LKP attorneys work with clients to establish LLCs to protect the client’s assets. If you have questions about establishing an LLC, contact us at 702-333-1711 to schedule a consultation.
What is an LLC?
An LLC is a legal structure for business ownership that shares the qualities of a partnership and a corporation. LLCs are a typically a good choice if there are one or a few business owners (called “members”). Under the structure of an LLC, the business operates by the terms of an operating agreement, with terms agreed upon by the members. LLCs are usually operated in a less formal manner than corporations, since corporations are required to carry out certain actions not required of LLCs.
LLC profits and losses generally pass through the entity to its members. Income, losses, and deductions are reported on the members’ personal income tax returns (unless certain tax elections are made that would render a different result). Unlike corporations, federal taxes are not paid at the level of the LLC (unless the LLC has elected to be taxed as a C corporation). Accordingly, one benefit of LLCs is that they avoid double taxation, which is an issue that corporations often face (the corporation pays taxes at the corporate level, and shareholders pay income taxes on dividends received from the corporation).
How Does Nevada Law Handle Personal Liability Issues of LLC Members?
A principal advantage of an LLC is its limited liability protections for members. Despite owning an interest in the LLC, your personal assets are not at risk of the LLC’s liabilities. Members (unless they personally guarantee LLC debts or other obligations) aren’t personally liable for an LLC’s debts, since the LLC is a separate entity. The reverse is also generally true – the assets of an LLC aren’t responsible for a member’s personal debts.
As a result, there are good “front end” (you’re protected against the LLC’s liabilities) and “back end” (the LLC assets are protected against future personal judgment creditors) asset protections.
Are There Any Exceptions to an LLC’s Personal Liability Protections?
Few legal issues are entirely black or white. LLCs and personal liability are no exception.
There are a few ways around it. One is that if you, in your membership or management capacity, committed serious offenses or wrongdoings, and/or you failed to follow the few LLC formalities that are required, a creditor may be allowed to “pierce” the LLC “veil,” essentially ignoring the business structure and obtain access to the LLC’s assets.
A personal judgment creditor can also have limited access to a member’s investment if it follows the correct procedure and a judge issues a charging order. A charging order would direct the LLC to pay the creditor any profit or income distributions that would have otherwise gone to the LLC member/debtor.
Though the creditor would benefit from the member’s financial or economic rights, the creditor doesn’t assume the member’s rights to participate in the LLC. The creditor cannot:
- Foreclose on the member’s interest
- Force the LLC to make a distribution
- Compel the LLC to sell property to pay the member’s debt
Thus, a charging order is not an ideal remedy for a creditor – but it still has an impact. As a practical matter, it will be difficult or impossible for the LLC members (including the debtor) to take money out of the business without first paying the judgment creditor. This cloud over the LLC’s management and the members’ ability to profit from the LLC may force the debtor to negotiate with the creditor to resolve the debt.
Contact a Lawyer in Nevada
LKP has highly experienced attorneys who help clients in Nevada learn about asset protection strategies, including forming LLCs. We have a Las Vegas office that services clients in both Las Vegas and Henderson. Contact us for a free consultation using our online contact form or call us at 702-333-1711.
Attorney Kennedy Lee practices in all aspects of trust and estate law. He views all legal issues from multiple angles (e.g. from litigation to administration point of view) to provide a higher quality of service to our client.
