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Common Mistakes That Could Make You Personally Liable for Your Business

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March 14, 2017
The first and best way to avoid personal liability for business debt is to form an appropriate business entity; you are fully responsible for any business debt incurred in a sole-proprietorship, while corporations and limited liability companies are separate and distinct legal entities that provide various levels of financial protection. If you and your business aren’t separate and distinct entities in the eyes of the law, you aren’t protected like you should be.

The corporate veil isn’t bulletproof

Forming a corporation or limited liability company won’t make you totally immune from personal liability. While the corporate veil provides for certain protections, shareholders, directors, members and managers can be held liable in circumstances ranging from the mundane to the egregious, such as:

  • Failing to comply with the rules for forming your business entity, or failing to follow any corporate governance rules that apply to your entity (e.g., a corporation failing to hold an annual meeting).
  • Commingling personal and business assets.
  • Diverting company assets for personal use.
  • Failure to maintain separate bank accounts for the business.
  • Failure to provide or secure an adequate initial investment for operating capital.
  • Personally guaranteeing payments of company debt.
  • Acting as an individual in company communication or signing company documents as an individual instead of a representative.
  • Using the company to engage in fraud, illegal or reckless acts.

In addition to these actions, directors, officers, members and managers can be held liable to employees for unpaid wages, governments for unpaid taxes, and even the company itself if shareholder payments were authorized without sufficient capital. Of course, the best ways to be held personally liable are to embezzle funds or profit from acting against the company’s interest.

Further, if you don’t make a distinction between your business and yourself, you invite others to do the same. If you are sued personally, there is no substitute for the counsel of an experienced business lawyer. At Gertsburg Law, our General Counsel and legal audit services can ensure that your personal assets are protected. To learn more about our services, call our Cleveland and Chagrin Falls business lawyers at 440.683.6383 or contact us to schedule an appointment.

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