How the business structure can protect your private assets from being claimed if your business is sued, keeping you financially safe even in the worst of cases.
About LLC’s in Florida
Limited Liability Companies (LLC’s) are recognised as a separate legal entity. Forming one is kept simple and easy. Owners are referred to as “members” in this business structure. You are allowed to have many members to create a multi-member LLC. Or, unlike in certain other states, Florida permits entrepreneurs to form single-member LLC’s where there is only one member (owner).
- Visit this site for further information and examples of LLC’s in Florida.
How to protect your personal and business assets
In an LLC, the best two ways to protect your private and company assets are to:
- Open a business bank account
- Get credit cards for your business
Open a business bank account
Without opening up a separate bank account for the business, your personal assets are at risk for being claimed in the event your business is sued. One of the aims included for all businesses is to maintain the corporate veil. That is why when your private and business accounts are mixed, your personal assets are at risk of being claimed should your business get sued. This is referred to as “Piercing your corporate veil.” Additionally, setting up a business bank account will make accounting and filing taxes much easier.
Get credit cards for your business
Another way of asset protection is to get company credit cards. This creates a separation between your business and personal expenses. Evidence from the company credit card history will assist with this. Therefore, if a legal claim is raised against your business, your personal assets will be safe. Moreover, applying for company credit cards will build your LLC’s credit which will prove beneficial if you need to raise capital later.
Why is asset protection important?
If you are unfortunate enough to find your business dealing with a court case and you have not protected your assets already, it is quite possible they are in danger of being claimed by the creditor (per a court ruling). No business owner wants their personal assets taken away from them, and the assets that are valuable are often claimed first (such as your house or car).
To give you an idea of the value LLC’s offer business in Florida here is an example:
You decide to open a bakery in Florida to provide beautifully iced cakes to the city. A competing bakery opens up next door to you. You have formed a legally recognised LLC of “Best Bakery Bites LLC” where as your neighbour opted to form a sole proprietorship, “Sam’s Scones.” Both your businesses flourish, but as you are start-ups, little profit has been made yet.
Unfortunately, a few months into opening the bakeries, your neighbour is up late baking as he is trying to master a new recipe to put on the market. They leave their gas oven on. Their kitchen catches fire and it spreads to yours as well. This causes all your ovens to be destroyed. A judge rules in your favour and your neighbour is ordered to pay for damages in order to purchase new ovens.
Your neighbour chose to operate a different business structure (a sole proprietorship) which is not an official legal entity. In the eyes of the law, there is no separation between business and private assets in a sole proprietorship. Their business cannot afford to cover the costs and your neighbour now becomes responsible for paying to fix the damages incurred out of their own pocket. Their car (a personal asset) is taken away to cover the debt.
If the roles were reversed, because you formed an LLC, this recognised entity will protect your private assets. Your neighbour would have no claim over them.