Starting a business venture is always a bit of a gamble. If your business eventually fails, though, you do not want your personal wealth to be in jeopardy. According to reporting from Yahoo!, protecting personal assets from the business’s creditors is one of the more common reasons for forming a limited liability company.
If you have an LLC, the business’s creditors typically cannot go after your personal wealth. This is because LLCs have a liability veil that protects their owners. Sometimes, however, courts pierce the LLC’s veil and hold owners personally responsible for business debts.
Factors courts consider
It is comparatively rare for courts to hold LLC owners personally liable for the obligations of their businesses. Nevertheless, when deciding whether to pierce an LLC’s corporate veil, courts usually examine the following factors:
- The LLC’s undercapitalization at the time of its formation
- The LLC’s lack of formal business records
- The LLC owner’s fraudulent representations
- The LLC owner’s use of the LLC to perpetrate fraud or commit crimes
- The LLC owner’s commingling of personal and LLC assets
As you can see, piercing an LLC’s liability veil often comes after an owner has engaged in egregious conduct. Still, knowing why courts typically hold owners personally liable can be useful during the formation stage of an LLC.
Your business strategy
If you want to keep your LLC’s veil intact, it is important to have sufficient capital when you form your LLC. You also should keep formal records and conduct legal and ethical business. Ultimately, with a bit of diligence and some care, you can use your LLC to safeguard your personal assets.