Think Your Corporation or LLC Totally Protects You From Personal Liability? Think Again
One of the main reasons business owners set up corporations and limited liability companies is to shield their personal assets from debts and other liabilities incurred by the business.
Corporations and LLCs exist as separate legal entities from their owners, meaning that they can acquire their own assets, enter into contracts, and take on debt. In turn, if a corporate entity is unable to pay its debt off, creditors are typically only permitted to go after the company’s assets, not the owners’ personal assets.
However, there are many circumstances where business owners can be held personally responsible for corporate or LLC debt. Sometimes, owners simply make innocent mistakes when running a business that leaves them personally liable.
Other times, a business owner may take certain actions, such as using a corporation to promote fraud, failing to observe corporate formalities, or even just inadvertently commingling corporate and personal assets. For these reasons, a court can hold the owners personally liable for the debts and liabilities of the corporate entity. When this happens, it’s known as “piercing the corporate veil.”
If you’re an owner of a business who’s thinking about incorporating, or if you already own a corporation or LLC, be aware of the following and how they could affect you:
Signing up to be Liable
Should you cosign on a business loan or personally guarantee a financial obligation for the corporation or LLC, you share responsibility with the company for paying it back. This means that creditors will come after you personally if the business defaults on the loan.
Using personal assets as collateral
Since many small business owners don’t have a lot of startup capital, you may be asked to use personal property as collateral on a business loan. If so, the personal property you pledged as collateral can be seized and sold off to pay your company’s creditors.
If you make a fraudulent representation or omission to secure a business loan for your company, you can be held personally responsible for those debts. What’s more, if your corporation or LLC was created to further a fraudulent purpose or you made business deals knowing the company wasn’t able to pay for them, you can be convicted for fraud, thereby voiding your personal liability protection.
Commingling your business and personal finances
As a small business owner, you may think that merging your personal finances with those of your company is a good idea, but it can sometimes be something as a bad idea. It can be something as benign as using a company account to pay for your mortgage or depositing a check made out to the company into your own account. In doing this, a court can decide that you’re using your company as an extent of yourself, and therefore you should be held personally responsible for its debts.
When you’re working with us as your Creative Business Lawyer on an ongoing basis, we regularly review your financials with you and ensure you’re keeping everything separate in the exact way you need to in order to protect your personal assets.
Failing to follow corporate formalities
Corporations and LLCs are legally required to follow certain formalities and observe certain rules. If you don’t treat the business like a corporate entity by not observing these formalities like keeping detailed records of meetings where important decisions are made, the court can rule your company is nothing but a shell and remove the veil of corporate protection covering your personal assets.
Indeed, maintaining corporate formalities is the single most important aspect of keeping you safe from business creditors. When you’re working with us as your Creative Business Lawyer, we offer maintenance packages to help you with this and keep your personal assets safe.
Given all of the complexities surrounding corporations and LLCs, you should consult with us as your Access lawyer to make sure you’re not opening yourself up to be personally liable for your business debts. We can not only help you decide which business entity structure is best suited for your situation but, we can also help you properly set up and maintain that entity, so your personal assets are protected.