If you interview 100 business owners and ask them if they feel their business assets are protected if they have an LLC or are incorporated, 95 of them will tell you they are. They would be wrong…at least in certain circumstances.
Since the primary reason to form these types of structures is to protect your personal assets, there are certain situations where this may not be the case. Even if you have one of these structures in place, there are several circumstances where you can be personally liable.
I wanted to share the 6 areas they identified that won’t protect your personal assets even if you have one of these structures in place. The 6 situations that won’t protect your assets are…
- You personally guarantee a loan for your business. Many times a business owner needs additional capital for continuing operation or business expansion. It’s common for a financial institution to ask for a personal guarantee on a business loan. While it might be necessary, be aware that this won’t be protected under your business structure should it cease to exist. If possible, avoid signing a personal guarantee for your business contracts.
- You sign a contract in your own name. This is one that is often times generated out of ignorance or carelessness. Sometimes a business owner will sign a contract for something in their own name rather than in the name of the business. When this occurs, you are transferring the liability to you personally and not the business. This means the structure can’t protect it because it actually isn’t under the business. Just be careful when you sign something to ensure the asset is under the business structure.
- You use your own credit card to fund a purchase. Similar to #2 above, when you conduct business with your name on the contract, in this case, a contract with the credit card company, you are transferring liability from the business to the person. Even with some of the debts, you would incur, putting them on a credit card may not give you the protection you think you have.
- You commit a crime or misrepresent yourself. This is pretty straightforward regardless of your structure…if you commit a crime no structure will protect you. Similarly, lying about something on an application can also potentially void the liability to the company.
- Your actions injure someone. Similar to #4 above, if you cause injury to someone else, the structure isn’t set up to protect against this type of damage. This is especially relevant for personal service providers such as doctors, consultants, tattoo artists, or even accountants. This would call for a general liability policy and some additional insurance in these situations.
- You don’t keep your LLC or corporation in compliance. There are certain rules each of these structures needs to comply with to be valid structures…such as meeting minutes, annual statements, etc. If you don’t keep these up to date or comply with state laws about running your business, it can cause some issues with your liability coverage from the structure.
So while you might have the right structure for your business, take the time to ensure you are also not doing things that could void all the benefits of this type of protection. It’s not too hard if you know what they are ahead of time…hopefully, this list will be of help to you in this regard.