Does an LLC protect your personal assets? The answer might surprise you.
Many entrepreneurs think protecting their personal assets is as simple as registering their business with their secretary of state.
But there’s a *little* more that goes into it than that.
In order to protect your personal assets from a potential lawsuit, you actually need to create separation. You need to start treating your business like exactly that — a business. A company entirely separate from you, as a person.
The last thing we want is for a potential legal fire in your business to mean your house or personal nest egg is on the line.
So in this post, we’ll break down:
1. What does LLC stand for?
2. What is an LLC?
3. What is Financial Separation (And Why It’s Key To Protecting Your Assets)
4. How to Run Your Business to Protect Your Assets
By the end of this post you’ll know the answer to the quest
What Does LLC Stand For?
An LLC stands for limited liability company. An LLC is a separate legal entity from you as a person that you create within your state. If you’re in the United States, at every state level with your Secretary of State, you can file the paperwork to create an LLC and register your business, and you’ll officially have a business entity.
What Is an LLC?
The defining feature of an LLC is that it is separate from you as an individual.
- It can open its own bank account
- It can own property
- It can enter into its own contracts
- It can pay its own taxes
It’s separate from you entirely. This separation is what shields you from personal liability, and protects your personal assets from your business.
Pssst. Still not sure if an LLC is the right business entity structure for you? Check out our post that breaks down the difference between an LLC vs. a corporation.
Does An LLC Protect Your Personal Assets?
So, does an LLC protect your personal assets?
The answer is, it depends on how you use it.
When you’re asking yourself whether an LLC will protect your personal assets, you have to look at whether you’re actually practicing financial separation.
In short, creating an LLC isn’t enough. You’ve gotta act like one, too.
The number one way to create financial separation is through opening a separate bank account.
You have to be diligent in separating out your personal finances and business expenses, and personal revenue and business revenue. Make sure everything’s going into the proper, separate accounts and there’s no commingling going on!
We know how easy it can be to accidentally charge that just-for-fun Amazon purchase to your business card and think, “It was just one time…it doesn’t really matter!”
But trust us, it does, boss.
If the courts saw your financial statements and came to the conclusion that you were treating your self and your business as one and the same, there’s really no argument that your business *is* in fact, a separate entity. Filing the paperwork for an LLC is not a guarantee your personal assets will be protected, but operating as one will.
By practicing financial separation day in and day out, you can create a strong business that’s profitable and protected. ✨
A Tale of Two Business Owners
What does financial separation look like in practice when running an online business? And what are the potential consequences if you’re not treating your LLC as a separate business entity?
Let us tell you a tale of two entrepreneurs to illustrate.
Business Owner A, let’s call her Fatima, is working with clients 1-1 providing mindset coaching. She took the necessary steps to form her LLC, set up her separate business bank account, and maintain separation between the two.
So when a client misinterprets her services as a mental health treatment and tried to make a claim against her, her personal assets were protected. She didn’t have to worry about losing her home, personal investments, or savings.
She knew there was a shield of liability between her personal assets and her business.
On the other hand, let’s talk about Business Owner B, Amanda. Amanda provides consulting and implementation services to fellow entrepreneurs.
Just like Fatima, she set up her LLC. She even went ahead and opened a business checking account. But unlike Fatima, Amanda is less diligent when it comes to financial separation.
Sometimes she accidentally cashes cheques into her personal account, or she mistakenly pays her home bills and utilities via her business account.
Amanda treats her finances like they’re one and the same.
All of a sudden, Amanda runs into a dispute with one of her clients, claiming damages of thousands of dollars, because she messed up in the delivery of the services.
Now, Amanda’s personal assets are up for grabs. In this case, simply forming an LLC did not protect her assets. Because she failed to maintain separation, her LLC isn’t shielding her from personal liability.
Which entrepreneur would you rather be? Amanda or Fatima?
If you’re shouting “Fatima!”, then good on you, friend. And if you’re resonating a *little* too hard with Amanda’s messy financial sitch, check out this post on how to manage your business finances like a boss.
Remember friends, while the legal side of business can be intimidating, it’s not as scary as you might think.
By opening a business entity like an LLC, and maintaining separation between business and personal, you can make sure your personal assets stay protected!
Ready to officially start your business? Get our ready-to-use, lawyer-approved, plug-and-play legal contract templates, so you can create professional boundaries while staying Protected & Profitable™✨
*The information presented in this blog post is for educational & informational purposes only. This should not be a substitute for customized legal advice from a licensed professional in a private setting. If you need legal advice, please consult with an attorney. This is not a law firm.