How does an LLC protect me from lawsuits?

How does an LLC protect me from lawsuits?

Answer

There are several articles on this site on the concept of limited liability.

What an LLC does is it creates a wall between the liabilities of your company, and your own personal assets.

If someone gets a judgment against XYZ, LLC, they can only go after the bank account, property, etc. of XYZ, LLC. They cannot go after the bank accounts or property of XYZ, LLC's owners.

There are exceptions to this concept, called piercing the corporate veil, which is there to prevent fraudulent use of corporations. There are a couple pages on this site about veil piercing, and how to prevent it.


Does an LLC Protect more than just assets?


by Nick
(New Jersey)

Hi, I have a small business (an LLC) that resells gift cards that I buy online. However, the prices of the gift cards that I buy online are somewhere between 40%-60% off the retail value of the card and I suspect these cards were acquired illegitimately or through some type of fraudulent activity, but I have done some research and couldn't find any evidence proving that this is so.

Also, the gift cards are available at these same low prices at most online auction sites like eBay, Sell.com and others.

My question is, if these gift cards do turn out to have some fraudulent or maybe even criminal activity behind them, what type of legal action can be brought against my company for selling the gift cards to my customers and what steps can I take to further protect myself if that is the case?


Answer

The way an LLC (or any corporate entity) works is that your LLC is a legally separate entity from yourself.

Your LLC and you are as different--legally--as you and your neighbor.

If your neighbor is sued for fraud, does that affect you? Of course not.

Same with you and your company. Now, if it can be shown that you personally knew of the fraud and participated in it, then you could be held personally liable. This is more common in closely held companies (for example, a single member LLC with no employees) than with a huge multi-national corporation.

As far as your company being held liable, that is going to depend on the facts and circumstances of the particular case, and you will need to consult an attorney on those issues.

Generally, you are not liable for your corporate debts, unless:

1. You contractually agreed to be liable (e.g. you personally guarantee a bank loan to your company;

2. Your corporate veil is pierced;

3. You are sued personally for your personal (as opposed to corporate) actions (e.g. you own a bar, and decide to punch out a patron--you could be sued personally for your assault).

If I had to guess at your situation, your corporation could be liable for fraudulent gift cards.

If you are charged criminally with anything, see a lawyer immediately...don't try to "talk your way" out of it.

You'll end up talking yourself into jail.

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How does an LLC protect me from lawsuits?

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Aug 27, 2012
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Protection from presently being sued
by: Anonymous

I am presently being sued, although its a frivolous law suit, I still would like to protect the little I have and that would be 2 mobile homes and a small amount in retirement, Would becoming an LLC protect me now?

Answer

Unlikely it would help you now.

Once you have been sued, any moves you take to "hide" or "protect" assets can be considered a fraudulent transfer by a court.

Under most state law, and federal bankruptcy law, if the retirement money you have is in an ERISA-qualified plan (e.g. a 401(k), IRA, Roth IRA, 403(b)) then it is exempt from creditors.

If you think there is a high likelihood of losing this lawsuit, and a judgment would be far in excess of what you could pay, you should speak with a bankruptcy attorney. This doesn't mean you will have to file bankruptcy, but they can advise you on how to prepare your assets in a non-fraudulent way to preserve as much of your wealth as possible.

For example, you mobile homes might be exempt from creditors under your state's homestead laws. You need to have a local attorney check that out for you.

Apr 21, 2012
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LLC vs. Ficticious name
by: Leslie

If I have an active LLC in Florida, can someone else then years later get the rights to a ficticious name with the exact name as my LLC? I have had the LLC for 4 years. They filed for the Ficticious name less than one year ago.

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