Protecting the Limited Liability of Your Small Business

Establishing a limited liability company (LLC) in Arizona protects a small business owner from personal responsibility for the debts and liabilities of the business. Personal assets are generally protected if the business is sued or cannot fulfill its obligations. The protection is not absolute, though; the owner must take steps to establish and protect the status. Working with an experienced business law attorney in forming and maintaining an LLC is the best approach to ensuring protection.

What Is the Limited Liability of an LLC?

Forming a limited liability company under the laws of Arizona protects a business owner from being personally responsible for debts, obligations, and liabilities of the business. This protection comes from forming an LLC. Other types of business structures for a small business, like a sole proprietorship or general partnership, do not provide limited liability protection.

If a properly established and maintained LLC faces financial problems or a lawsuit, the owner’s personal assets, like a home, car, and savings, cannot be taken to satisfy debts or obligations of the business. On formation of the LLC, the business becomes a legal entity separate from the owner(s). The LLC can enter contracts, own property, and undertake debts and obligations, just like any other business. But because the LLC is a separate entity, the owner is not personally liable for the obligations and debts of the LLC.

Protecting LLC Limited Liability

As the name implies, the limited liability protection of an LLC is not absolute. There are several ways that an LLC owner can lose the liability protection of the business structure. For example, an LLC owner who is negligent or engages in illegal or fraudulent activities can still be personally liable for any resulting damages. There are also other ways that the protection can be lost, but a business owner can take specific steps to maximize and avoid losing liability protection.

Maintain LLC Records

An LLC that is not properly established and maintained may not have the liability protection. Financial records of the business must be kept current and must be maintained separate from personal activities and assets. Commingling business and personal assets could lead to a court disregarding the limited liability of the business. The LLC owner should keep separate accounts, credit cards, and documents for personal and business endeavors. Personally guaranteeing business debts or obligations may also expose an LLC owner to personal liability.

The LLC is a separate legal entity. It must be treated and maintained to respect that separation. Not only does commingling personal and business matters create the potential for liability, but it can also confuse customers, clients, and business contacts about whether they are dealing with you as an individual or a business, which can create significant problems. Disclosing the full legal name of the business in all business matters, including use of “LLC” as part of the name, is essential to establishing and maintaining the identity of the business as the separate entity that it is.

Another record-keeping safeguard is to always use written contracts and agreements that make it clear the LLC is the contracting party, rather than the business owner personally.

Secure Liability Insurance

Establishing an LLC is not a substitute for having business liability insurance, which provides additional protection against unpredictable events. To some extent, the nature of the business determines what type of liability insurance is appropriate. Having the right business liability insurance can limit exposure to financial risk and provide additional protection for personal assets. A business law attorney can help you determine what type and how much insurance you should have for your business.

Have an Operating Agreement

One of the most important steps to ensure liability protection is creating an operating agreement for your business. The operating agreement is a legal document that establishes the rights and responsibilities of the owner(s) and outlines the management and operation of the company. Without an operating agreement, personal assets may not be fully protected.

Even for a sole owner LLC, the operating agreement creates a clear structure for management, tax treatment, adding members, and dissolving or transferring the business. An operating agreement can also include provisions for asset protection.

Without an operating agreement, your limited liability may be easier to challenge in court. You also risk having a court apply default LLC rules that don’t fit your business. You may also lose business opportunities or have difficulty in some transactions when you do not have an operating agreement, which is important evidence that your LLC is a separate legal entity.

In addition to creating an operating agreement when you form your LLC, you should comply with all ongoing requirements of Arizona law, such as filing an annual report. Properly maintaining your LLC is the best way to reinforce your financial security and shield your assets from lawsuits and creditors.

Forming and maintaining an LLC is a valuable way to protect personal assets from business obligations and liability. To ensure that you take all the necessary steps to set up and maintain an LLC, it is essential to work with an experienced business law attorney in setting up and maintaining your business.

Schedule a Free Consultation with an Experienced East Valley Business Law Attorney

Attorney Shane Peterson assists businesses of all sizes and types with the important legal considerations involved in setting up and running a business, including protecting your business assets and personal assets both short-term and long-term. Shane has extensive business law and estate planning experience and helps business owners address both of these critical areas to ensure the business and family are fully protected now and in the future.

Peterson Law Offices provides high-quality legal services at affordable prices. Your first consultation is always free of charge. We welcome inquiries from clients throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.