Run Your Company Properly or Risk Your Personal Assets Anyway
Some business owners form a corporation or LLC – often via an online service – and think they have adequately protected their personal assets from business liabilities. Usually a corporation or an LLC is treated as a separate legal person, but business owners can still be personally at risk from potential lawsuits. Getting to a business owner’s personal assets is called “piercing the corporate veil.”
The legal concept that an entity is a separate legal “person” from the owners usually tends to shield owners of limited liability companies and corporations from personal liability in case of a business loss. In situations where an individual is so clearly using the company as a personal bank account, a plaintiff may sue the owner directly.
How do you protect yourself from a personal loss for business activities?
Keep formal records. Keeping corporate minutes and accounting for every dollar spent may seem tedious but it is a necessary part of running a corporation or limited liability company without running the risk of becoming personally liable. Treat your company like IBM, and turn in an expense report to get money out.
Do not commingle personal and business assets. You and your corporation should be entirely separate legal entities. If you have separate businesses, be sure never to transfer funds from one business into another without a paper trail and formal authorizations.
Make sure you have sufficient assets to cover debts and losses. Capitalization is something that courts consider when deciding whether or not to allow the plaintiff to pierce the corporate veil. Proper insurance can be among the assets.