Liability Protection / Protecting Assets FAQ

Do you have any information about the legal protection of a single member LLC in Illinois?

Do you have any information about the legal protection of a single member LLC in Illinois?  I was asking because someone told me that the single member LLC in Illinois doesn’t have any type of protection from the legal point of view, but the multiple members LLC does have legal protection from your assets.

Also, how can I get a resale number in Illinois? I am buying blank items, then I embroider them and sell them in my shop, but some suppliers are asking me for my resale number.

 

 

Our Response: The LLC provides protection between your business and personal assets.  The LLC is a separate legal entity, so in the event of the LLC being sued, your personal assets should not be at risk, provided the LLC activities weren’t negligent, etc.  There isn’t any differentiation between a single vs multiple member LLC.  The same form is filed regardless of how many people are a part of the LLC.  There are some states that do not allow single member LLC’s but Illinois does.

When you signed up for the Illinois business tax number, you would have received a 8 digit number and resale certificate which allows the vendor to not collect sales tax.  Some vendors will just ask for the number, others will want a copy of the certificate and some may have you fill out a form –http://tax.illinois.gov/taxforms/sales/crt-61.pdf.

 

 

One member of a two member LLC received a 1099 payment. The check and 1099 was made out to the member personally – not the LLC. Can this “personal” 1099 be included in the LLC as income?

One member of a two member LLC received a 1099 payment. The check and 1099 was made out to the member personally – not the LLC.  Can this “personal” 1099 be included in the LLC as income? The payment is related to the LLC’s purpose and mission.

 

 

Answer – The short answer is yes, but it’s not recommended.

LLC’s are typically created to separate business and personal assets.  Even though the work may have been legitimately for the activities from the LLC, may call that separation into question should there be an audit.  Should the LLC ever be audited or sued, several factors will be evaluated, one of which is including the separation of business finances from the owner’s finances.  This point becomes more important if the LLC is taxed as a corporation vs partnership or sole proprietorship.

You have two options for endorsing the check that was paid to the partner rather than the LLC.

  • Write “For Deposit Only” along with the LLC’s name and account number. This is considered as a restrictive endorsement where the check can only go through the LLC’s bank account under your name.
  • Write “Pay To” along with the LLC’s name and having the partner sign their name. This is called a special endorsement where you are essentially giving the check to another “person” (in this case the LLC) to deposit in this other “persons” account.

While this isn’t ideal, the funds can be deposited with the LLC. Just try to not make it happen often so the LLC’s liability protection isn’t put at risk.

Can A Husband & Wife With Separate Businesses Share An LLC?

My husband and I are both self employed. My husband just started a contract job and I have a small sewing business. Can we share an LLC even though our businesses are separate entities?

– Susan

Answer

You are able to operate multiple businesses under the umbrella of one LLC to get the liability protection and as an added benefit, will only have one tax return to file. If you are going to continue doing business under the existing sole proprietorship business names, lets say its “Susan’s Sewing” for example, you will need to file an assumed name notice form (also known as doing business as, DBA, etc) with the county you run the businesses out of.

You will also need to get a FEIN number and state business tax number for the LLC.

 

 

Could You Please Clarify Business Versus Personal Assets/Debts With Regard To Liability, Protection And Bankruptcy?

A couple questions:

1. An LLC protects your personal assets from business debts/lawsuits, etc; does it also protect your business assets from personal debts/lawsuits, etc? (Could a creditor from a personal account seek compensation from your business?)

2. The same questions w/regard to bankruptcy: If you personally file bankruptcy, can you leave your LLC in tact & untouched (including assets)? And, how does that work in the event of business debts or loans that have been personally guaranteed? (Are these discharged as personal debt within the personal bankruptcy – still leaving the business in tact – or do they expose your entire business to risk by connecting the two?

Answer

These are fairly complicated questions, but here’s the overview:

1. Your ownership in the LLC is a personal asset of yours. Think of it like a stock. If you own GM stock, GM’s creditors can’t come after your house simply due to your ownership.

On the other hand, a personal creditor of yours can seize your assets, including your GM stock.

However, your membership interest in an LLC is somewhat different from owning stock in that your LLC’s operating agreement can have provisions in it which prevent a creditor who seized your interest from exercising any control over the LLC.

In other words, the personal creditor would “own” the LLC interest in the sense that the creditor would receive any profit distributions (this right of the creditor is called a “charging order”), but could not control the operations of the LLC.

This has an interesting application. Remember how LLCs are pass-through entities? That means that the owner owes taxes on the LLC’s profits, regardless of whether the LLC pays out any money to the members.

Normally, of course, the members will pay themselves out all the profits, or at least enough to cover taxes.

However, if a creditor has taken over your LLC interest, the remaining members could do something very sneaky to the creditor.

They could cause the LLC to recognize profits (say, by selling an appreciated asset), but NOT distribute any money to the members.

Thus, the creditor would owe taxes on his share of the profits, but would receive no money to pay them with.

2. Bankruptcy would be similar to the above, but with the extra complications of bankruptcy law. You’d really need to talk to an attorney about this one.

There is some case law that says that a single member LLC owner who goes bankrupt might be in a worse position than if a member of a multi-member LLC declares bankruptcy with regards to control of the LLC, but again, you’d need to speak with an attorney.

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Does A LLC Protect A Business In A Divorce?

If I have been working a business by myself, can I form an LLC and have my business protected in case of a divorce?

Answer

Are you already married?

If you’re already married, there isn’t a whole lot you can do to protect your assets in case of a future divorce.

Divorce laws differ by state, but generally, you are able to keep what is termed “separate property” in a divorce. Separate property is money obtained prior to the marriage, or by gift or inheritance.

The trick with separate property is if you commingle it with marital property, it can become marital property.

So, if you get a big inheritance after your marriage, and deposit it in a joint checking account with your wife, and both you and your wife are putting money in and taking money out of that account, your inheritance is likely to become marital property.

The same goes with your interest in your LLC–it’s no different than if you buy stock during your marriage. It’s likely to become marital property.

Now, some people form companies and LLCs to fraudulently conceal assets in a divorce, but I’m not going to go down that road.

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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.

So while forming an LLC won’t stop someone from suing your company, what it will do if properly structured is ensure that they can only sue your company, and not you personally.

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.

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Does An LLC Protect More Than Just Assets?

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?

– Nick, New Jersey

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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Should Authors Have An LLC?

I recently published a book and plan to sell it to middle and high schools. Do I need an LLC?

Answer

I think the main consideration is whether you are solely an author (writing) or if you are engaged in the active publishing of your work (printing, distribution, marketing)

* Most authors are sole proprietors.

* Almost all publishing companies are incorporated in some form or another (corporation or LLC).

The primary purpose of the limited liability company is to protect your personal assets from liabilities generated by your business.

Do you foresee significant liabilities from your book?

I doubt you’re going to get sued by someone tripping and falling over your book….however, there are a few potential sources of liability I can think of.

Employees: Are you hiring any employees to work in your publishing enterprise?

I would strongly recommend that every small business person avoid employees like the plague unless absolutely necessary.

In today’s regulatory climate, it’s almost as expensive to dissolve the employer-employee relationship as it is to dissolve a marriage–plus, ex-employees sue more often than ex-spouses.

Contracts: While your publishing business doesn’t have much tort liability (slipping and fall over your book), you are involved in making contracts with printers, resellers, etc.

You are possibly exposed to contractual liability.

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LLCs and Divorce

My husband and I are business partners, and we also have some real estate. Our business is an S corporation, but my husband insists on getting everything under an LLC corporation, so far our relationship is fine, but we had divorce attempts in the past, so i would like to know if doing these changes will affect me in the event of a divorce.Thanks!

Answer

Divorce and ownership of assets is extremely complex, and the law is state specific (community property vs. non-community property states and so forth).

As a general rule, the titling of assets acquired during the marriage does not affect property division in the event of a divorce. Changing the titling of assets acquired PRIOR to marriage (e.g. separate, non-marital property) can convert separate assets into marital assets. Therefore, it matters when these business assets were acquired.

You will need a local attorney on this one.

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Personal Judgements And Assets In An LLC

If I have an LLC, am sued personally, can they come after assets in my LLC to satisfy a personal judgment? Thank you.

– Mike, Washington

Answer

Not directly, but indirectly.

The assets of the LLC are not yours, but your interest in the LLC is, and can be attached.

For example, if you own shares of Microsoft, and a judgment is rendered against you, the creditor can seize your stock in Microsoft.

But they can’t seize Microsoft’s assets (buildings, unsold copies of Vista sitting in warehouses, etc.)

What the creditor can do is get a charging order against your interest in the LLC such that if the LLC makes payments to its members, then the creditor will get those payments and not you. It’s similar to garnishing wages.

Your operating agreement can be written to prevent a creditor who seizes your LLC membership interest from exercising voting rights or any control over the business’ daily operations. This is a core concept of the llc’s asset protection.

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