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It's cheap insurance to create an LLC to protect yourself from extreme situations for this kind of thing. Worst case the LLC goes defunct, but you won't be pers

It's cheap insurance to create an LLC to protect yourself from extreme situations for this kind of thing. Worst case the LLC goes defunct, but you won't be personally liable. https://www.nolo.com/legal-encyclopedia/limited-liability-protection-llcs-a-50-state-guide.html https://www.nolo.com/legal-encyclopedia/limited-liability-pr... EDIT: This comment is based on the assumption that the parent was trying to start a side business. I'm certainly not advocating fraud.

throwlaplace 7y ago
wut? are you suggesting that if there's a cost overrun you just shutdown the LLC? that sounds like a loop that couldn't possibly be true? when you sign TOS you agree to be responsible for service fees. if being an LLC indemnifies against these sorts of charges it would also indemnify you against other legitimate fees? take out a business credit card and cash advance and then close the LLC? free money!
- toolz 7y ago
  It basically does work like that, however the law is almost never that cut and dry. The situation you're describing would have the person benefiting from the money as being personally liable because that person presumably would be taking the cash advance for self-interest instead of taking the loan in the interest of the business.
- mushufasa 7y ago
  more or less, yes. bankruptcy courts vary by location. the whole point of a 'limited liability corporation' is you not being personally liable. BUT if you have 'malicious intent' -- meaning you build an llc on purpose to overrun costs and get free stuff, you CAN and WILL be sued and face penalties. cause that's just cut-and-dry fraud.
  - tluyben2 7y ago
    Companies are doing this all the time and not prosecuted (or prosecuted and not found guilty); they just do not make it obvious. So the ‘will’ is not that cut and dry really; even in countries where bankruptcies are not normal and frowned upon (like NL), there are many companies only created to spend money and killed off when it runs out. On paper they look like real businesses. Also it is not unusual to put employees in a separate llc and kill that when the money runs out; again that happens a lot, even with the intent of doing that. As long as it looks good on the outside, it works. I cannot stand it personally but there are not many solutions to resolve it; you cannot read the minds of the founders to get their real intentions.
- danpalmer 7y ago
  Yes. This is exactly what the “limited liability” in LLC means. You are not personally liable, only the business is. There are nuances to this, obviously fraud is fraud, regardless of using a shell company to perpetrate it, and a new business is unlikely to get a credit limit large enough to be a worthwhile avenue for fraud.
- flir 7y ago
  Banks often ask for personal guarantees from ltd owners for precisely this reason. I've just skimmed the T&Cs and I can't see any indemnity clauses, but that document's massive and I'm just some guy, so who knows. (Incidentally, it's fairly common to structure a pair of ltds with the assets in one and the liabilities in another. If the whole thing crashes and burns, at least the IP doesn't go with it).
- CamelCaseName 7y ago
  Which is exactly why banks require 2+ years of business history, collateral, or a personal guarantee. They will also review your financials when you apply for additional credit facilities.
- Gene_Parmesan 7y ago
  As someone who used to work as an attorney in a past career, there's a policy called "piercing the corporate veil" to handle cases like this. Basically, if the only reason an LLC exists is to protect the owner from consequences of these sorts of shenanigans, the courts can pretend like the LLC doesn't exists for purposes of financial responsibility. Note that this is a vague, general answer and most certainly does NOT constitute legal advice.
deleted 7y ago
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lonelappde 7y ago
Good luck telling the judge your single person LLC with no investors shouldn't be pierced to pay debts incurred by its only owner and only employee.
- Terretta 7y ago
  Works fine if you didn’t co-mingle personal usage of the business accounts.
  - freehunter 7y ago
    This VERY heavily depends on your state and I'm sure a lot of other factors. Years ago when I set up my single-member LLC my lawyer was quick to point out a thousand ways the LLC would be useless in court. Mingling bank accounts was only one of them. The IRS, for what it's worth, treats a single-member LLC as a sole proprietorship and all losses/gains are considered personal income. As always, check your state laws and consult a real, in-person lawyer.

throwlaplace 7y ago

wut? are you suggesting that if there's a cost overrun you just shutdown the LLC? that sounds like a loop that couldn't possibly be true? when you sign TOS you agree to be responsible for service fees. if being an LLC indemnifies against these sorts of charges it would also indemnify you against other legitimate fees? take out a business credit card and cash advance and then close the LLC? free money!

toolz 7y ago
It basically does work like that, however the law is almost never that cut and dry. The situation you're describing would have the person benefiting from the money as being personally liable because that person presumably would be taking the cash advance for self-interest instead of taking the loan in the interest of the business.
mushufasa 7y ago
more or less, yes. bankruptcy courts vary by location. the whole point of a 'limited liability corporation' is you not being personally liable. BUT if you have 'malicious intent' -- meaning you build an llc on purpose to overrun costs and get free stuff, you CAN and WILL be sued and face penalties. cause that's just cut-and-dry fraud.
- tluyben2 7y ago
  Companies are doing this all the time and not prosecuted (or prosecuted and not found guilty); they just do not make it obvious. So the ‘will’ is not that cut and dry really; even in countries where bankruptcies are not normal and frowned upon (like NL), there are many companies only created to spend money and killed off when it runs out. On paper they look like real businesses. Also it is not unusual to put employees in a separate llc and kill that when the money runs out; again that happens a lot, even with the intent of doing that. As long as it looks good on the outside, it works. I cannot stand it personally but there are not many solutions to resolve it; you cannot read the minds of the founders to get their real intentions.
danpalmer 7y ago
Yes. This is exactly what the “limited liability” in LLC means. You are not personally liable, only the business is. There are nuances to this, obviously fraud is fraud, regardless of using a shell company to perpetrate it, and a new business is unlikely to get a credit limit large enough to be a worthwhile avenue for fraud.
flir 7y ago
Banks often ask for personal guarantees from ltd owners for precisely this reason. I've just skimmed the T&Cs and I can't see any indemnity clauses, but that document's massive and I'm just some guy, so who knows. (Incidentally, it's fairly common to structure a pair of ltds with the assets in one and the liabilities in another. If the whole thing crashes and burns, at least the IP doesn't go with it).
CamelCaseName 7y ago
Which is exactly why banks require 2+ years of business history, collateral, or a personal guarantee. They will also review your financials when you apply for additional credit facilities.
Gene_Parmesan 7y ago
As someone who used to work as an attorney in a past career, there's a policy called "piercing the corporate veil" to handle cases like this. Basically, if the only reason an LLC exists is to protect the owner from consequences of these sorts of shenanigans, the courts can pretend like the LLC doesn't exists for purposes of financial responsibility. Note that this is a vague, general answer and most certainly does NOT constitute legal advice.

deleted 7y ago

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lonelappde 7y ago

Good luck telling the judge your single person LLC with no investors shouldn't be pierced to pay debts incurred by its only owner and only employee.

Terretta 7y ago
Works fine if you didn’t co-mingle personal usage of the business accounts.
- freehunter 7y ago
  This VERY heavily depends on your state and I'm sure a lot of other factors. Years ago when I set up my single-member LLC my lawyer was quick to point out a thousand ways the LLC would be useless in court. Mingling bank accounts was only one of them. The IRS, for what it's worth, treats a single-member LLC as a sole proprietorship and all losses/gains are considered personal income. As always, check your state laws and consult a real, in-person lawyer.