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Can you lose your LLC’s personal liability protections?

On Behalf of | Dec 13, 2021 | Business Law

Succeeding in business often requires some financial risk. By forming a limited liability company, you protect your assets from your creditors. That is, if someone wants to sue your LLC for unpaid bills or anything else, only your business venture’s assets are likely to be on the line.

While the LLC business model provides comprehensive protection for your wealth, the protection it offers is not bulletproof. If a court decides to pierce your LLC’s liability veil, your creditors may go after your wealth.

Undercapitalization

Capitalization is the first area a court is likely to explore when deciding whether to hold you personally liable for your LLC’s debts. If undercapitalization has left your LLC with insufficient funds to conduct normal business operations, you may be in trouble.

Blurred lines

There should be a firm line of separation between your finances and those of your LLC. This means you should have different business and personal accounts. If you commingle your wealth with your LLC’s assets, a court may decide to waive liability protections.

Bad actions

You need to follow the law when conducting business. If you use your LLC to engage in fraud or other bad acts, a court may not be willing to reward you by protecting you from your LLC’s creditors. This is especially true if you receive a major advantage at the detriment of your LLC’s vendors, customers or others.

Ultimately, by having good business practices, you probably do not have to worry about losing your LLC’s personal liability protection.