Question:

Can forming a limited liability company protect my personal assets from being liable for business debts? Is there ever a situation when my personal assets aren’t protected? -James Roward

Answer:

Since a limited liability company, or LLC, is considered a separate entity under state law, a business owner’s personal assets, such as a home and investments are generally protected from business-related liabilities. This special status, however, is hardly a cure-all when it comes to liability protection, says James G. Burns, a tax attorney in Irvine, Calif. If you’ve been professionally negligent, committed malpractice or participated in legal misdeeds you can kiss that protection goodbye, he says.

Burns points to case law in which bankruptcy court judges have been known to “pierce the corporate veil” — that is, hold a corporation’s owners liable for business debts or liabilities — and foreclose on LLCs that commit fraud or don’t observe corporate formalities. “Something as simple as forgetting to take annual minutes might merit piercing a business’s corporate veil,” he says.