Forming an LLC is a smart move for any small business owner. It gives the impression that your assets are shielded if the business encounters financial trouble. But here is the surprising truth: an LLC does not always protect you from personal liability, especially if certain mistakes are made along the way.
What Is an LLC Supposed to Do?
An LLC, or Limited Liability Company, is meant to create a legal separation between your finances and your business debts. In theory, if your business cannot pay its bills, your personal assets—like your home, savings, or car—should be safe.
That is how it should work… if everything goes perfectly. But reality often plays out differently.
How Business Owners Lose LLC Protection
Many small business owners unintentionally pierce the corporate veil—a legal term that means the courts no longer recognize the separation between you and your business. Here are some common ways this happens:
Most banks and credit card companies will not extend credit to a small business unless the owner personally guarantees the loan. That means if the business cannot pay, they will come after you—your assets are on the line despite having an LLC.
If you have ever paid a personal bill from your business account—or used business funds for personal expenses—you are at risk. This kind of financial mixing makes it easy for courts to say your LLC isn’t legitimate, stripping away your liability protection.
3. You are Behind on Trust Fund Taxes
Did your business collect sales tax or payroll tax and fail to send it to the IRS or your state? That is a huge red flag. These trust fund taxes are the government’s money, and they do not care if your business is an LLC. You can be held personally liable, no matter what.
4. You Used Personal Credit for Business Expenses (or vice versa)
It might seem harmless to use a personal card for a business purchase at the moment, but it creates confusion, financially and legally. These blurred lines can lead to personal liability if things go south.
What Happens If the Business Fails?
If your business shuts down and debts remain, creditors will do everything they can to collect. That could mean lawsuits, wage garnishments, or even levies on your personal bank accounts. This is when many business owners feel blindsided—they thought the LLC had them covered.
What Are Your Options If You’re Drowning in Business Debt?
Here is the good news: even if your LLC did not protect you the way you expected, you still have options. One of those options is bankruptcy. It’s not just about wiping out debt—it’s about stopping collections, avoiding lawsuits, and giving yourself space to reset both financially and emotionally.
And if you are unsure whether bankruptcy is the right path, that is completely okay. Most people are not certain when they first explore it. The important thing is to get clear, informed guidance so you understand all your options before things get worse.
Bottom line? Forming an LLC is a significant step, but it is not foolproof. Avoiding personal liability takes more than filing the right paperwork. It takes smart financial practices, awareness of legal responsibilities, and sometimes, knowing when to get help.
If your business is struggling or you are facing overwhelming personal guarantees, do not wait. Exploring your options now could save your financial future. Contact the Law Office of Lee M. Perlman to schedule a free consultation.
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