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Pros and cons of becoming a llc to avoid bank garnishments etc..


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I was just wondering if any self employed people on here has ever heard of becoming an limited liability corporation to keep the creditors from garnishing your bank accounts? I was doing a search on here and couldn't find any threads on it.

 

I've been reading about it all day, and it looks like a good option, but just wanted to get some other opinions.

 

I have over $25,000 in debt over 4 credit cards. And 1 of them is about to sue me. So, was just looking at my options on what to do to protect my business accounts.

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http://blog.tabini.ca/2010/09/llcs-are-a-good-idea-but-you-can-still-get-sued/ 1. The LLC is a separate person

If someone decides to sue your LLC, they will at least try to get to you personally. After all, the legal fiction of corporate personhood exists specifically to create a cushion between you and the LLC’s liabilities. The process of “getting to you” is called “piercing the corporate veil”—that is, getting a court to look beyond the fiction of corporate personhood to get to the person behind the curtain.

 

Piercing the corporate veil is a very difficult thing to do (as it should be), provided that you treat the LLC as a separate person.

In practice, this means that you must conduct the affairs of the LLC separately from yours, establishing that, when you are acting on behalf of the LLC, you do so in the LLC’s best interest as it is your fiduciary duty. This means taking care of a few formalities, like keeping your business license current, opening separate bank accounts and, especially, avoiding commingling your personal funds with the company’s. It also means that you cannot use the company as a shield to commit fraud, and so on, and so forth.

So, no treating the LLC as your personal piggy bank. Make sure you record all financial transactions, and always act in the best interest of the LLC, and not your own.

2. Get a lawyer

Lawyers are expensive. There is no way around that. However, unless you are a lawyer, it’s best if you leave the formation of your LLC to one, instead of using one of these rubber-stamp services that are available over the Internet.

 

There are a couple of reasons for this. First, unlike a service, the lawyer will be able to offer you some advice on whether an LLC is the right thing for you, as well as give you some basic guidance on how to ensure that you run the LLC properly. Second, should you ever get in front of a judge, it looks good if you show that you make it a practice to refer legal works to those who are expert in the field, rather than taking matters into your own hands, not to mention that, if the lawyer screws up, you can go after his or her insurance.

Oh, a final piece of advice: I often hear people complain about lawyers as if they were the scum of the Universe—they’re ignorant, lazy, stupid, greedy, evil… take your pick. That is, in my experience, the best way to ensure that the relationship with your lawyer will be unproductive and expensive.

Lawyers are experts in the law—a field that is often illogical and difficult to understand for the lay person. Which, incidentally, is exactly what non-techies say of programming. So, find a lawyer you can work with and make sure that your relationship is based on mutual respect.

3. Get an accountant

The LLC is a separate person, which means that it needs to file its own tax return. Even if you think you can file it yourself, it’s always best to get an accountant—once again, the reason is simple: what best way to act in the interest of the LLC than getting a third party to validate all the financial data?

 

That’s not to say that you need an audit, but it’s always good to get a CPA to double-check your calculations. And, once more, there’s another insurance that you can collect from if they screw up.

4. You can still get sued

The worst thing that anyone can tell you is that starting an LLC means that people can’t sue you. That’s no more true than saying that crossing over the zebras will prevent a car from running you over.

 

Nothing prevents any person from suing your LLC or you personally and, since the legal system works on default, you will have to spend the money to defend that lawsuit, no matter how frivolous.

What the LLC does is to provide you with protection from the results of a legal action. A determined party with deep pockets will still be able to take you to court in an attempt to pierce the corporate veil, make you spend considerable amounts of money and, generally speaking, eating a ridiculous amount of your time for a number of years. Having an LLC in place, provided you’ve behaved properly, will eventually protect you from the consequence of an action, but the process that gets you there will still be long, stressful and extremely expensive.

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Racecar summed it up nicely, but let me add two points...

 

1.  Forming an LLC or even a C Corp AFTER you run up personal debt would do you no good whatever.  If you are self employed, and deposit your FUTURE customer payments in a checking account in the LLC's name, it would make it harder for your creditors to get at (as racecar describes), but they'll still come after you personally.

 

2.  Forming an LLC and then applying for credit in the LLC's name will almost certainly require your personal guarantee...and if your credit is already shot, you'll be denied.

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I have several LLCs - actually 6. I set them all up on my own, but paid a lawyer to write the operating agreements and title a few of the assets in the name of the LLC. Also, get a CPA/EA to help with any tax issues and the most important thing - NEVER COMMINGLE PERSONAL and BUSINESS ASSETS.

 

 

LLCs are hard to get to, since in many states, a judgment creditor has to get a charging order from a court to go after an LLC. A judgment creditor can try to get at distributions, but LLCs do not have to make distributions like sub-s corps.

 

You have to have them set up and running before you get sued, or else they do you no good.

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