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Are You Starting A Business? Be Proactive In Limiting Personal Liability

When starting a business, being proactive in limiting personal liability can provide bountiful peace of mind as you navigate growth and success. In some cases, when business funds are tight, business owners can be held personally liable for the debt. Planning ahead protects your personal assets, as well as the company itself.

State and federal laws can leave loopholes and make you vulnerable to individuals or other companies that might "pierce the corporate veil." Meaning, if there is doubt of a separation between your company's assets and personal assets, you can be held personally liable. Overall, these standard laws don’t protect you from specific circumstances. Protecting yourself from damages caused by employees or business activities is something business owners should proactively seek out.

A Litigation Lawyer Has A Four-Pronged Approach

In order to protect yourself adequately — from the least to greatest of worst-case scenarios — it is generally recommended to take the basic 4-pronged approach. This 4-pronged approach includes (1) following corporate formalities required by state law, (2) maintaining written documentation, (3) ensuring your business has sufficient capital to operate, and (4) keeping your business and personal finances separate.

  1. Follow Corporate Formalities

    Make sure your corporation is formed correctly and follows your state's regulations for establishing and organizing a corporation. If these steps are not done appropriately, your corporation or LLC may be administratively dissolved, leaving you susceptible to personal liability. Failing to file the required paperwork and paying associated fees to the state makes everything involved in funding the organization vulnerable to personal liability. Nick Heimlich Law specializes in business formation.

  2. Maintain Written Documentation

    Alongside the initial documents to form your LLC or corporation, it is recommended to have an initial organizational meeting and maintain written documentation. All your corporate transactions need to be documented and accounted for in detail. As a matter of good business practice, the decisions you make daily should be documented and in compliance with your state's law.

  3. Capitalizing Your Corporation

    Your corporation should start with enough money to cover the necessary expenses. If funding isn't considered and appropriately allocated, you risk personal liability. For most businesses, necessary start-up expenses for essential equipment and other items can be drawn out in the very beginning. All companies have basic start-up expenses, necessary start-up equipment, and other items that can be recorded in written documents.

    Your company doesn't need to have significant money in the bank. Still, if your company can be considered never to have had enough funds to operate on its own, a court can determine it was never intended to be a separate entity from you, opening you up to personal liability.

  4. Keeping Funds Separate

    Maintaining a strict separation between your business and personal finances is essential. If this separation isn't done correctly, a court can determine your company is a sham. And like a sole proprietor, you become liable for the debts of the business.

    Therefore, if you're funding your business with your personal expenses, make sure it is correctly allocated to the company. All expenses should be paid through business accounts. The corporate accounts should be separate and unlinked to your personal bank accounts.

Hire A Litigation Lawyer — Nick Heimlich Law Can Help

Make sure that each transaction made for your organization can easily be proven as having a business purpose. If a judge has trouble differentiating what are your personal assets from those that belong to the company, they can be more likely to pierce the corporate veil and hold you personally liable.

Again, the 4-pronged approach includes (1) correctly forming the business, (2) good record keeping, (3) reasonably funding your corporation, and (4) keeping funds separate. The best way to avoid personal liability — in the unfortunate case that your business’s activities result in litigation — is hiring a business litigation lawyer to assist in your business’ foundation. Nick Heimlich Law knows how to aid clients in ensuring they are protected from personal liability, learn more about the firm here.