Forming an LLC or corporation is one of the smartest ways to protect your personal assets from business debts and legal claims. It creates a legal separation between you and your business. However, that protection isn’t absolute.
It all depends on how you run your business. If you don’t follow the rules or treat your business as a separate entity, you risk losing that protection entirely. Here are some of the missteps that can expose you to personal liability as a business owner.
1. Mixing personal and business finances
One of the most common mistakes is commingling funds. Using your business account for personal expenses or the other way around makes it harder to prove that your business is a separate legal entity. A court may decide that your business is just an extension of you, which can expose your personal assets to creditors or legal claims against the business.
To avoid this and preserve your liability protection, keep separate bank accounts, use dedicated credit cards for business expenses and properly document any money you transfer between yourself and the business.
2. Personally guaranteeing business debt
This one catches many business owners off guard. If you personally guarantee a loan, lease or line of credit, you agree to be personally liable. It doesn’t matter what business structure you have. You’ll still be responsible for the debts you’ve personally signed onto.
3. Undercapitalizing your business
Not having enough money in your business to cover its debts, liabilities and operating expenses can expose you to personal liability. When a business appears unfunded, a judge may conclude that you’re using the entity to avoid responsibility for business obligations or dodge liability. Maintaining adequate capitalization demonstrates that your business is legitimate, able to meet its obligations and truly separate from you.
Protect your business the right way
Liability protection is powerful, but only if you maintain it properly. Small mistakes can have big consequences if they blur the line between you and your business. Reaching out for experienced legal guidance can help you maintain your liability shield so your assets stay safe from your business liability.