Does Forming An Llc Or Corporation Fully Protect You From Liability?


The Importance Of Establishing An Llc In NY.

There is a lot at stake for the owners and partners in business entities, and it is not limited to any initial capital contribution. Exposure to personal liability for the actions of the company or its other agents is also an inherent risk, so setting up a business specifically to protect members’ personal assets is essential. Establishing an LLC or other limited liability corporation helps limit personal exposure.

People establishing an LLC in NY should be especially careful about how they set up the business and how they lay out duties and responsibilities, regardless of the size of the company. New York law around LLCs and other limited liability companies is complex, and it doesn’t offer the same level of protection as some other states. Forming an LLC is a start toward protection of your personal assets, but you have to ensure that all paperwork is filed properly and the business structure is sound to avoid various types of liability.

Two Types Of Liability

Single proprietors and partners in businesses have potential exposure to lawsuits based on unfulfilled contractual obligations. Their business and personal assets are also at risk for actions that are covered under tort law, such as negligence. Recognizing different types of liabilities should guide the setup of your corporate framework and how you set up responsibilities and oversight in your business.

Contractual Liability

There are many circumstances under which agents sign contracts for companies, such as for bank loans and rental agreements or in contracts with customers. These actions could expose all partners to potential liability. Part of protecting yourself and your business in these situations is making sure that it is clear in any contract that the person is operating as an agent of the company, and using its name rather than their own. In cases where you have to personally guarantee the contract’s fulfillment, such as in a rental agreement, you put your personal assets at risk.

Tort Liability

There are several instances in which a company may be sued under tort law, such as negligence or discriminatory actions towards employees. The person who committed the acts is open to potential liability, as is the company. In general, other partners are protected from personal liability as long as they did not participate in the acts that led to the lawsuit. But this protection does have some holes that you must try to close to protect yourself.

Do You Still Have Liability If You Form An Llc Or Other Limited Liability Corporation?

In establishing an LLC in NY, you have protected yourself against some forms of liability, and your personal assets are usually protected. But as mentioned above, this may not be the case if you were personally involved in the actions that led to the lawsuit. You may also be liable if you are an officer or other member of the LLC. A court could decide that your participation in the day-to-day operations of the company means you should have been aware of, and taken action to stop, what another member was doing. The LLC does offer better protection against personal liability if you had no idea what the other member was doing. 

Your investment in the company itself may be at risk due to New York laws that allow creditors to go after the LLC itself. Even if only one partner in the company is responsible for the debt, creditors can go after the assets of everyone. New York courts can also issue what is known as a Charging Order. This order forces the LLC to pay creditors rather than pay the member who is in debt. If the debt can’t be satisfied in this manner, the creditor can take over that member’s stake in the company and become part of the LLC. 

In the most extreme case, the court can dissolve the LLC to pay off creditors. The assets of the company go to the creditors, and you could lose your own stake in the business even if you played no part in the original debt. This doesn’t happen often, but it happens often enough that you must take steps to protect yourself against the eventuality.

How To Ensure That You Have Maximum Personal Liability Protection In Your Llc.

There are several steps you should take when establishing an LLC in NY to make sure that your personal assets are protected from actions attributable to the company or to its other members. You should also ensure that the day-to-day operations of the business do not expose you to personal liability. The practical application of the following steps offers you several layers of protection.

Do Not Allow Your Assets To Comingle

It is critical to make sure that everyone’s money stays separate when operating an LLC. The company’s funds and each member’s personal funds must be easy to distinguish. Members should never write personal checks or make bank transfers from their personal accounts to cover business expenses or loan payments. Find a way to cover these expenses through the LLC, even if it means each member contributes more to the LLC’s capital.

Make Sure Your Initial Capitalization And Operating Budget Is Enough

To avoid members using personal funds, be sure that you have enough money to not only get the business off the ground, but to keep it running smoothly. Try to foresee every circumstance that could lead to fiscal difficulties, and be sure you can cover them. Once you have decided on initial capitalization and operating budget numbers, add as much as you can above that to offer even more protection to your personal assets. 

Follow Your Operating Agreement To The Letter

Some people form LLCs or other limited liability companies after working together for many years. Members may be friends, family members or people who just don’t believe in a strictly run corporate life. To protect yourself from personal liability, you must ensure that your company is seen as a formal company, with rules set out in your Operating Agreement that actually dictate day-to-day operations. That means sticking to keeping records that you say you will keep, and holding any meetings, training or other activities specified in that agreement.

Follow Strict Accounting Practices

Like following your Operating Agreement, setting up and following strict accounting practices when establishing an LLC in NY is critical to protecting each member’s personal assets. The company’s finances must be accurate and thorough, and must clearly show that company activities are paid for with company money. Holes in accounting practices can quickly lead to both civil and potentially criminal actions.

Pay Everyone Properly But Carefully

The Operating Agreement of an LLC or the Shareholder’s Agreement in a corporation sets forth pay levels and profit sharing levels that stay in place unless the company modifies them. It is important to stick to these payments as written, but to also make sure doing so won’t put the company in a position where it can’t cover its liabilities. If you have to choose between one or the other, the corporate liability payments come first.

Set Up Specific Oversight Practices

Protecting your personal assets from liability starts with protecting the assets of your LLC or limited liability corporation from partners who don’t follow the rules. Once you have developed a staffing framework, be sure to include oversight measures for each officer or member who could open the company to liability. For example, every member who is responsible for securing contracts or loans should have someone else who makes sure they are following all the proper procedures. The same is true for ensuring that each officer is fulfilling their obligations in terms of their daily tasks.

Get Business Insurance

Getting insurance to cover your business helps shield your personal assets in case of lawsuits against your LLC or corporation. Choosing the proper business insurance is not the time to cut corners. Talk to a professional and find out which insurance products offer the best protection to the company. General liability insurance may not be enough to cover your specific operations.

Why Choose

Establishing an LLC in NY while also protecting your personal assets is complicated. There is a lot to think about, and you probably want to spend your time participating in the business itself and not in the intricacies of corporate and personal liability. But not spending time on properly protecting yourself and your company could lead to devastating business and personal liabilities.

Windsor helps make sure your paperwork is accurate, timely, and meets all the requirements of New York state law. We can help you set up your LLC or limited liability corporation, find any documents you might need, and file your Articles of Organization. We can also help you with the publishing process necessary to operate your LLC in New York. Let our more than 20 years of experience guiding businesses through the maze of corporate paperwork set you up for success so you can focus on running your business. Doing it right the first time is the best protection you can have for both your LLC and your personal assets.

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