Protecting your personal assets is one of the biggest advantages of forming a limited liability company. With this popular organizational structure, your creditors and others typically cannot go after your personal wealth. Instead, they may only seek recovery from the assets of your LLC.
There is a significant exception to this rule, though. If a court pierces your LLC’s corporate veil, you may be personally liable for your LLC’s debts. Therefore, you should take steps to minimize the likelihood a court may pierce your LLC’s corporate veil.
A wall of separation
Arguably, the most effective thing you can do to protect your LLC’s corporate veil is to keep your personal assets separate from the LLC’s. You should not commingle cash, investments, equipment, furnishings or anything else. Building a wall of separation strengthens your LLC’s corporate veil.
Responsible and legal conduct
A judge is not likely to reward you for irresponsible or illegal conduct by keeping your LLC’s corporate veil intact. If you use the LLC to commit fraud, for example, a judge may pierce the veil. Therefore, you should make sure your LLC’s business dealings are legitimate, responsible and legal. You also should not use your LLC to flout tax or other laws.
Judges often apply principles of equity when settling business-related disputes. If you do not pay your LLC’s creditors, a judge may allow them to go after your personal assets. This is especially true if you do not keep assets separate or engage in irresponsible or illegal conduct.
For many legitimately reasons, LLCs routinely fail to pay creditors. Nevertheless, to preserve your LLC’s corporate veil, you should strive to be as fair as possible in your business dealings.