When you incorporate your business, you are in effect protecting yourself, and personal assets from business obligations. This is done through state and federal laws that were written to shield the individual. Without having incorporated, or built a properly formed business (e.g. L.L.C.), you the individual and business owner remain personally liable for anything that arises under the business. Think small, it usually rears its head in a simple contract dispute, but the fact is that there are many forms this comes in and that is why protecting yourself and your business is a top priority.
How Personal Liability Can Show Up
One of the primary goals, if not THE primary goal for forming a corporation or L.L.C., is to limit the liability exposure of the owners of the business. This is done by doing all business in the name of the entity. If this is carefully done, the theory is that only the assets you have invested or placed into the business will be subject to any lawsuits or creditor claims. In practice, however, especially with smaller businesses, it is not entirely possible to limit your exposure. Often this is a result of borrowing from institutions which require the providing of a personal guaranty in order to obtain the extension of credit.
Nevertheless, your business entity is your first line of defense and the protections afforded by a business entity should be maximized to the fullest potential by avoiding any number of pitfalls businesses owners subject themselves to. For instance, you must respect the business entity by not commingling your personal assets with those of the business or vice versa. You will also need to maintain good corporate records and follow through with your annual business meetings. Adhering as closely as possible to the laws regarding your entity is a good start, but alone it will not fully satisfy protecting yourself.
Keep The Entity Separate From Yourself
You should do business only in the name of the business. This seems simple enough, but often people will form an L.L.C. to hold a rental property but then execute the lease arrangement in their personal names. Make it a practice to sign all documents, contracts, invoices and other documents as a signer on behalf of the corporation or L.L.C. – and not in your personal capacity.
Other Possible Liability Issues
There are a myriad of other issues that can be brought on if not properly protected against. Some of these include: capitalization of the business entity, personal guaranties, statutory agents, changeover in membership interests in an L.L.C., taxes, segregation of business accounts from personal accounts, and proper documentation in regards to loans to the business entity, to name a few.
Arm Yourself With Knowledge & Speak With An Attorney
Platt & Westby, P.C., has been representing businesses and business owners for over forty years. If you are in the process of setting up a new business, need a tune-up on an existing business entity, or facing more complex issues such as litigation, contact us or call 602-277-4441 and put our experience to work for you.