In a sole proprietorship or partnership, there is no legal distinction between business assets and personal assets or business debts and personal debts. For example, if the sole proprietor:

• Cannot pay business debts, creditors may go after personal assets to satisfy the debt
• Cannot pay personal debts, creditors may go after business assets to satisfy the debt

Owners of an LLC, on the other hand, enjoy a significant amount of asset protection because, generally speaking, a creditor can only go after the assets an owner has invested in the business. Additionally, if a creditor wishes to go after the interests of one owner/member of an LLC, it cannot actually levy on the interests (as it could with a corporation), but must instead place a lien on that member’s interest. The lien will remain until the debt is satisfied, though the creditor will never outright seize the member’s interests. This is referred to “charging order protection.”

Asset protection in an LLC is not absolute, however, and there are numerous circumstances under which your personal assets may still be at risk. For this reason, it is important to consult with an experienced business attorney to ensure that your assets are properly protected.

The following are only some of the ways an LLC owner can work to ensure that personal assets are protected from business creditors of legal liability:

Operate your LLC as a completely separate entity. Too many LLC owners fail to run their company as a completely independent business. For example, they may use LLC funds for personal expenses or co-mingle funds with personal assets. In some cases, if you combine personal and business finances, creditors may claim that your LLC is simply an “alter ego” and an attempt to shield assets, and creditors may be able to seize your personal assets.

Failing to properly capitalize your LLC. Too many people form an LLC, take out business debts, but fail to put enough capital into the business to adequately meet its obligations. In such cases, creditors may claim that your LLC is a sham and they may be able to strip you of the asset protection provided by the LLC name.

Elect to be taxed as a corporation. LLC owners have the option to select pass-through taxation (profits are reported on personal tax returns) or to be taxed as a corporate entity. Though corporate status can result in double taxes, it does help further establish your LLC as a separate entity and assist in protecting your personal assets.

Purchase necessary levels of insurance. Many business owners believe that they will not make costly mistakes or get into accidents, however such events can happen to anyone. If your LLC faces legal liability for your actions, your personal assets may often be at risk to cover any resulting judgments. If you have the proper level of liability insurance to cover the judgment, your personal assets will be protected. If you are not sure of the necessary level of insurance for your LLC, it is wise to consult with an attorney regarding proper insurance for your type of business.

Consider forming a trust. Trusts are legal devices that can be used to protect your personal assets from creditors. When you form an irrevocable trust, you can place your home, investments, liquid assets, and more into the trust, which will be administered by a third party called a “trustee.” Though you relinquish direct control of these assets, you will know they will be protected and properly handled so they may be passed on to your beneficiaries and will not be seized by business creditors.

These are only some of the methods of ensuring that your personal assets are protected from the creditors of your LLC. Every business is different, therefore every business will have different needs for asset protection planning. An experienced business attorney can evaluate your particular situation and help you design a comprehensive asset protection plan for your LLC. Do not hesitate to contact a California small business lawyer for assistance today.

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Collect Unpaid Receivables

If your clients are sending late payments or not paying at all, re-bill them as a reminder that they owe you for your services. If reaching out to the client cordially doesn’t work, you could consider setting up a payment plan with him or her. Sending a demand letter through your attorney or filing with a small claims court could also be a viable final option if your client still has not paid you.

Strategically Cut Salaries

If you have employees and you need to cut salaries, be sure you are familiar with your city and state’s laws about payroll and employee compensation. You should consider cutting your own salary first and speaking directly with other managers to see if they would be willing to take a pay cut for a short amount of time. Be up front to your employees if you need to temporarily cut their salary or if you can’t pay them.

Use all of your available resources

If your problems truly are temporary, you may want to consider selling off high-value inventory or using lines of credit to get quick access to cash and pay your bills on time. This “quick-fix” isn’t something that should be repeated often, and if you’re unsure about this step you may not want to use your credit or acquire more debt.

Prioritizing Bill Payments

You should create a plan to prioritize your bill payments in case your business suffers from cash flow problems. Some of the essential payments you should prioritize are:

– Taxes: this includes the money you collect for federal payroll taxes, state sales taxes, and state income taxes. Failing to pay your taxes in a timely manner can result in fines and penalties from the IRS, which could include wage garnishment, seizures of property, or even criminal charges against you.

– Payroll: Some state laws penalize you for failing to pay your employees on time, and not paying your employees could make you vulnerable to legal claims. Additionally, you could lose your employees if you habitually fail to pay them.

– Overdue bills: Also known as “aged payables,” these bills put your credit score at risk. They also often accrue interest (and possibly late fees,) which make them more difficult to pay off the longer you leave them unpaid.

– Utilities and Rent: Your service providers can revoke their services if you fail to pay your bills, and your landlord can evict you for nonpayment of rent. Try to negotiate payment plans with your utilities providers and landlord. You might want to consider forbearance or a partial payment plan if you’re seriously behind on your payments.

Sometimes, you may be unable to pay all of your bills on time. In such cases, communication is key–talk to clients who are late with payments, talk to your employees about what’s going on with your business, and talk to your creditors. Don’t overdramatize your problems, but don’t try to hide them, either. Be honest with all the affected parties and consider all of your options before deciding to cut salaries, liquidate inventory, etc. Planning to encounter these situations before it happens may also allow you to mitigate the damage that your business might suffer during an economic downturn or off-season.

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Bankruptcy offers many benefits to distressed consumers and businesses, including the discharge of most debts and the opportunity to start building credit again. Based on the numbers, more and more people are seeing the value in the fresh start that bankruptcy offers.

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