If you own a business, it’s nearly always best to incorporate or form a LLC. This gives you the ability to separate your personal finances from your business, protecting you from ruin if your business encounters some sort of catastrophic debt. It’s important to understand the rules and limitations of these arrangements, however, as they do not constitute blanket personal immunity from all circumstances.
For example, a LLC protects you from being held personally liable for the actions of other owners or of employees. However, a LLC does not shield you from personal liability for your own actions. Given this, there are a few industries where forming a LLC doesn’t really help you. For example, if you’re a writer, selling your work through a LLC won’t protect you from legitimate accusations of libel.
Your personal finances are also only protected if you opt to not personally guarantee to pay the company’s debts. If you are starting a LLC with a business loan, however, your creditor may require you to make this personal guarantee as a term of financing. It’s always important to read the fine print!
These are universal rules that apply throughout the United States. Each state also has its own added rules and terms that you need to be aware of. In Minnesota, creditors are not allowed to touch the assets of a LLC in order to settle a personal debt or to take over the owner’s interest. The most that creditors can do is obtain something called a “charging order”, which allows it to intercept any payments the LLC might make directly to the debtor. However, they cannot order or authorize such distributions. So if the LLC does not voluntarily make a distribution, the creditors get nothing. Since charging orders are so toothless, creditors rarely even attempt to use them.
Are you thinking about incorporating, or do you have an existing corporation and have concerns about creditors? Contact us for a free consultation and we’ll be happy to advise you further.