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6 Situations Where A Corporation Or LLC Will NOT Protect Your Personal Assets


Setting up your business as a corporation or a limited liability company (LLC) is a great way to go for many entrepreneurs since an entity can protect personal assets from business liabilities, may help lower taxes if utilized properly and ensures the continuity of the business.

However, here are six situations where an LLC or corporation will not protect your personal assets:

Provide a personal guarantee for a business loan.  Many first-time entrepreneurs and other business owners are often asked to sign personal loan guarantees until the business is viable or shows strong financials.  If you do so, be aware that you are losing personal liability protection for that particular debt.

Sign a contract in your individual name.  This is a careless mistake that too many entrepreneurs make.  Never sign your personal name on a contract or purchase agreement if it is for a business-related matter.  Instead, always be sure to sign as a company officer.  This ensures that you are not agreeing to take on any of the liability or obligations in the contract or agreement on a personal level.

Paying business expenses with a personal card.  If you use a personal credit card for any business debt, you are personally responsible for that debt rather than the company.

Engage in illegal activity or misrepresent.  If you break the law as an officer of a company, you will typically lose any protection afforded by your corporation or LLC.  This is especially applicable if you misrepresent yourself on a credit or loan application for the business, in which event you will likely be personally liable for the debt.

Incur a negligence or malpractice claim.  Service providers like doctors, lawyers, accountants and others who are potentially vulnerable to litigation through a malpractice or negligence claim should operate through an entity and also protect themselves against claims with a robust professional liability insurance policy.

Fail to keep the company in compliance.  Both a corporation and an LLC have formalities that must be followed to keep them in compliance according to state law.  If you fail to follow these formalities, including filing annual reports and keeping separate books and records, you risk losing your personal liability protection.

We can help you navigate the legal challenges you face as a business owner with proactive solutions to business legal issues including the tax implications for different ownership structures, protecting your personal assets from business liabilities and more.

Source:  Bloomgarden Goudreau & Rosen PA August 2014 Newsletter

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