Withdrawing Funds from the Business

As we've discussed elsewhere, an owner of a limited liability company (LLC) or a corporation enjoys limited liability for the business's debts. In other words, the owner's liability is limited to the amount he invested (or promised to invest) in the business entity.

In contrast, the entity itself has unlimited, personal liability for all of its debts. Further, because of the inherent risks associated with the operation of a business entity, generally the assets invested within the business form are more vulnerable than the owner's personal assets outside of the business form.

Thus, owners should strive to minimize the amount of vulnerable capital invested within the business form. In strategically funding a business entity, the owner can accomplish this goal in several different ways, including initially investing a minimum amount in the entity; capitalizing the entity with debt (i.e., loans and leases); and using equity to encumber the entity's assets with liens that run in favor of the owner (or a separate entity controlled by the owner), and which result from extensions of credit (e.g., loans, unpaid salary, etc.) from the owner to the entity (see our discussion of protecting capital through separate holding and operating companies).

However, to be effective on a continuous basis, the strategy of minimizing the amount of vulnerable capital invested within the business form must be coupled with a strategy calling for regular withdrawals of vulnerable funds from the business as these funds are generated.

Funds generated by the business entity, but left within the business form, are in essence invested in the entity, as if they were invested from an outside source, but in a way that leaves them vulnerable to the claims of the business's creditors. A continual withdrawal of funds, as they are generated, guarantees that vulnerable funds will not accumulate within the business entity.

To efficiently accomplish this goal, you'll need an understanding of the restrictions on withdrawals, before you then can review the withdrawal methods available to you. Once your plan to minimize vulnerable capital is in place, you'll need proper authorization and documentation to secure the withdrawals from a creditor's challenge.

Clearly, a business planning a major expansion, requiring a significant amount of capital, may want to accumulate assets within the business form. Assets can be safely accumulated, provided that the owners employ other asset protection strategies in lieu of continuous withdrawals, in particular the use of liens that run in favor of the owners. The best strategy in this case, of course, would be to accumulate the funds in the holding entity. Alternatively, these funds may be withdrawn, in accordance with a regular withdrawal policy, and then reinvested when necessary.