LLC’s – The Best of Both Worlds
You’ve got a great idea for a small business llc. Confidence and anticipation are at an all-time high. In short, you’re ready to conquer the business world! Don’t cut the rid ribbon and pop the bubbly just yet. Before opening your doors, make sure a small business llc is the right entity for you.
Many start-up companies are turning to the LLC (Limited Liability Company) to bring their business dreams to life. Small business llc’s offer members the best of both worlds – providing limited liability protection (like corporations), as well as “pass-through” income taxation (like partnerships). What’s the catch?
Liability for Investment Property in Name of Small Business LLC
While the benefits are clear, holding rental property in the name of an LLC does not protect members from creditor claims.
Liability of small business llc members can be broken into whether the conduct of the member was related or unrelated to the LLC.
Rule: Creditors can go after a small business owner’s llc interest for conduct unrelated to the LLC.
- Example 1: Small business LLC owner Brian is unable to pay his personal credit card debt. Brian is insolvent other than his llc ownership interest. Brian’s credit card company can pursue the interest Brian has in the small business LLC to recover what Brian owes.
Rule: Creditors can go after the small business LLC or the personal assets of the individual LLC members for conduct related to the LLC.
- Example 2: Harry (H) and Wanda (W) form an LLC (called “H&W LLC”) to hold their interest in 2 California rental properties. Terry Tenant slips and falls down the exterior stair wells of one of the properties held in name of “H&W LLC.” Terry Tenant can sue both “H&W LLC” as well as any of the personal assets of H or W because the conduct was related to the LLC.
Advice: Small business llc owners should maintain insurance coverage with personal umbrella protection.
- Example 3: H and W could protect their personal assets by maintaining a personal umbrella liability protection policy. Insurance policies cover the cost of defense – attorney fees.