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Can Personal Creditors Threaten My LLC?

I recently answered an Avvo question about whether personal financial problems would create trouble for the LLC that an individual was forming. The question and answer, substantially edited, are provided below.

Q. I am starting a new company. I wish to establish an LLC. I had a recent foreclosure and they are coming at me for 70k on a 3rd against the property. I also have a credit card judgment for 18k and 30k of other outstanding debt. Question is whether an LLC can protect me. I have investors placing 50-100k in this project and i cannot have any issues moving forward. [Emphasis added.]

A. You will not be personally responsible for the LLC’s obligations (unless you provide a personal guaranty, and assuming there are no “alter ego” problems), and the LLC will not be liable for your personal obligations.

However, it is possible that a personal creditor could seize your LLC membership interest (or the economic portion thereof). For that reason, the LLC Operating Agreement should have detailed membership transfer restrictions and related provisions (e.g., regarding voting rights in the event that membership is transferred to an unapproved transferee).

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Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

  1. 6/27/2011 | 8:31 am Permalink

    so, if i am personally in a debt crisis, incorporating and/or llc conversion will not save my business from liens or judgements? How can I protect my business from my personal debts?

  2. 6/27/2011 | 12:46 pm Permalink

    Sorry, but this blog – which is oriented toward start-up businesses – is not the right place to look for answers to your questions. You need the services of a lawyer who specializes in asset protection.