Choosing to operate your business as a corporation or limited liability company (LLC) is a smart move to shield your personal assets from potential business debts and liabilities. These entities exist independently, allowing your business to engage in contracts, acquire assets, and incur debts without putting your personal assets at risk. However, there are situations where business owners might find themselves personally liable, exposing them to risks.
Understanding the Risks
Even with the protective shield of a corporation or LLC, there are circumstances where personal liability can arise. It’s crucial to be aware of these pitfalls to ensure the safety of your personal assets.
1. Avoid Commingling Finances: Commingling personal and business finances, even inadvertently, poses a significant risk. Using a business account for personal expenses or depositing business checks into a personal account can jeopardize the separation between you and your business entity. In legal terms, this is known as “piercing the corporate veil,” where personal liability becomes a real threat.
2. Steer Clear of Personal Guarantees: Personally guaranteeing business debts or co-signing business loans means sharing responsibility for repayment. If the business defaults, creditors can pursue your personal assets, regardless of the business entity in place.
3. Avoid Pledging Personal Assets: Using personal property, such as your home, as collateral for business loans exposes your personal assets to potential seizure if the business fails to repay the loan. Only use personal assets as collateral when no other funding options are available.
4. Do Not Engage in Fraudulent Activities: Fraudulent actions, such as securing a loan with false information or knowingly making business deals your company can’t afford, can lead to personal liability. Committing fraud voids the protection offered by your business entity.
5. Follow Corporate Formalities: To maintain the separation between you and your business, adhere to corporate formalities. Keep detailed records of important business decisions, adopt corporate bylaws, and follow administrative rules. Neglecting these formalities could result in the court disregarding the corporate entity, exposing your personal assets.
Protecting Your Business and Personal Assets
Navigating the complexities of business entities requires strategic planning and legal guidance. As your Estate and Succession Planning Attorney, we provide essential support to safeguard your personal assets from potential business liabilities. From selecting the right business entity to maintaining necessary formalities, we ensure your protection.
Don’t overlook the importance of a solid legal foundation for your business. Schedule a meeting with us to discuss your Exclusive Legacy Planning Session and ensure seamless alignment with your business vision and goals. By addressing these considerations proactively, you can operate your business confidently, knowing your personal assets are well-protected. Contact us today to get started.
This article is presented by Michelle Bell, an expert in estate planning and business succession services. Our office provides comprehensive legal support for businesses, assisting you in making informed decisions throughout your entrepreneurial journey and in planning for future contingencies. We also offer a specialized session where we review your business’s legal structures. To arrange this consultation, please click the following link: https://calendly.com/mcblawpllc/30min.
The information in this article is intended purely for educational and informational use and should not be considered as advice on ERISA, tax, legal, or investment matters. For advice specifically tailored to your unique situation, such advice should be sought independently from this educational content.