Is Your Home At Risk from Your Side Business?

Written by Wesley Henderson

September 19, 2020

home with trees

If you are using an LLC or other legal entity (and using it correctly), then no probably not (unless you personally commit a tort or wrongdoing like punching someone). If you are a sole proprietor, then you need to understand your states’ homestead protections. What these do is protect a certain amount of equity that you have in your home. The idea is to prevent a creditor (other than your bank) from foreclosing on your home for a minor (or major) debt.

Homestead Exemption

The homestead exemption exists in every state but New Jersey and Pennsylvania and, to varying extents, is designed to protect your primary residence. Most states protect around 50,000 to 100,000.  This means it would protect up to that amount of equity.  These exemptions typically make it unattractive to go after your home. 

Let’s say you have a 200,000 house. You have 100,000in equity (i.e. 100,000 that you owe on your mortgage). With a 100,000 homestead exemption state, the creditor would likely not be able to foreclose because there is no money to get to. You are protected on your 100,000 exemption of equity. 

In short, yes, it’s possible for a creditor to reach your home if you are a sole proprietor. Mind you, it can always change based on legislative whims. So, what can you do to control and protect your house. 

What about an LLC for your business?

Bingo. This is a great way to shield your home from your business activities that may otherwise bring your house into the view of creditors for satisfying judgments. 

If you are operating a business, the smart move is to use an LLC and good agreements. Use Drafted Legal to take care of your business and protect your house.

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