One of the main reasons to create an Arizona LLC for any business activity is the protection it can provide for your personal assets if your business is sued. Those protections can be limited, though, so it’s important for any business owner to understand those limitations and the updated Arizona LLC laws, too.
Here are some of the important steps to take to protect yourself and your personal assets from Arizona LLC litigation.
What is an Arizona LLC and How Does It Protect My Assets?
LLC stands for limited liability company. An LLC is the more popular way for people to establish new businesses in Arizona. The purpose of an LLC is to establish a legal entity that bears responsibility for your business activities. This also typically means that any claims against your business would be directed at the LLC, instead of you personally.
When setup correctly, an LLC would only allow someone that sued your business to recover business assets and money invested in the business, safeguarding your personal assets.
Can LLC Owners Still Lose Personal Assets in Arizona LLC Litigation?
The simple answer is yes, but it typically requires certain actions from the individual owners to put their personal assets at risk. There are two common scenarios that can trigger personal responsibility even with an Arizona LLC.
The first is fraud or personal negligence. A business owner cannot lie on official documents, like an application for a line of credit or required license. Any instance of fraud committed by an owner of an LLC can result in personal liability.
The second instance that can result in personal liability is gross negligence. If you get in a drunk driving accident in a company car, the LLC will not provide you any protection. This can also be the case if your negligence around the workplace results in a serious injury to someone.
Arizona LLC Owners Should Avoid Personal Guarantees if Possible
Business owners should understand that the protection of an LLC no longer applies if they provide a personal guarantee for a loan or contract. Once an individual provides a personal guarantee, they have effectively deemed the LLC protections void for that loan or contract.
Piercing the Corporate Veil or Alter Ego
One of the most important reasons to work with an experienced accountant is to avoid any possibility of the business owner being held personally liable. When this happens, it is called “piercing the corporate veil” because the business owner’s personal assets are no longer protected by the “veil” that separated the business entity from the owner. Basically, this means that business owners have treated the business assets as their own personal piggy bank. Even simple things like paying for groceries or personal expenses with a company card can put the LLC protections at risk.
Most business owners are aware that company finances need to be clearly separated from personal finances, but they might not be aware of the need for strict adherence to all contracts and official documents being written for the business entity.
There can also be issues with signing contracts in just the name of a business owner, instead of making sure that all official documents are signed on behalf of your business entity.
How Arizona LLCs and Business Owners Can Get Better Protection
There are some simple steps that every business owner can take to make sure their personal assets have the maximum amount of protection from any Arizona LLC litigation. First and foremost, work with an experienced Arizona LLC attorney and accountant to set up the business correctly and maintain a tax compliant operation. This can ensure the entity is properly established and the finances are handled correctly as the company takes on new business.
It can be easier than most business owners expect to run into trouble by mixing business and personal assets. Just a few uses of the company card for personal reasons can put you at risk.
The second most important thing is to get good liability insurance. The type and amount of insurance required to protect your business will depend on differing factors. Businesses that require transportation and travel require more than a home-based business.
Working with an insurance agent that represents other businesses in your industry is the simplest way to determine the appropriate insurance policy to cover any predictable risks.
Disperse Any Extra Funds to Owners
Generally, you should only keep the amount of money in the business account that your Arizona LLC reasonably needs for operations and expenses. Once company funds have been appropriately used to pay employees, take care of normal expenses, and buy required supplies, the additional funds should be dispersed out to the LLC owners. Any funds remaining in the LLC bank account when a claim is initiated against the company are at risk in that lawsuit.
It may seem counterintuitive for many business owners to be discouraged from keeping those funds in the business’s bank account, but business owners have more protection if the funds are used for business purposes or distributed as profits to the partners or employees.
Experienced Arizona LLC Attorney
It is all too common for business owners to wait for litigation to arise before finding an experienced Arizona LLC attorney to represent their business. Finding a great attorney right now to review your current business and assess any potential risks can make the difference between losing your business and your personal assets when there is a claim against your business.
M&G Law routinely works with Arizona LLCs to reduce legal risks and protect the personal assets of the owners against any future claims. Contact us today at 602-562-7218 to schedule an initial consultation or make an appointment online.