The majority of the questions I receive from business owners involve how to limit personal liability. We live in a sue happy world. There are times when companies deal unfairly with people and filing a lawsuit may be the only recourse to provide a remedy for the injured party and hold the offending party accountable. However, there are also times when a person will initiate a lawsuit against a company with “deep pockets” hoping to get a quick settlement. There are few things as discouraging to business owners as being sued for trying to provide a service that you are passionate about. Having the correct business structure and upholding good business practices can give you peace of mind that you are not personally liable if someone sues your business.
A great way to limit personal liability is to form an entity, either a corporation or limited liability company (LLC). Most businesses start without forming an entity. An individual can start a business as a sole proprietor without filing anything with the state. Two or more individuals can start a business as a general partnership on a handshake deal without filing with the state. The formation of these business structures while simple and cost-effective, do not protect the business owner(s) from personal liability. If someone chooses to sue a sole proprietor or general partnership, the owner(s) could lose not only their business assets, but their personal property as well. The LLC structure has the best protections against personal liability; however, the corporation structure provides more options for investors if you are looking for funding. My goal is to provide you with the most protection while maximizing your flexibility to accomplish your business plan.
Even the best business structure cannot make up for poor business practices. I recently met with a business owner whom I’ll call Todd. Todd builds homes for a living and runs his business through his LLC. As I began asking Todd about how he runs his business, I quickly realized that Todd was opening himself to personal liability by commingling funds. Commingling funds means using business funds for personal use. Todd would pay for everything with the business account. The first thing an opposing attorney will do during a lawsuit is show that the business owner has commingled funds. This is referred to as piercing the corporate veil. The most common occurrences are when the business owner takes his family out to the movies or dinner on the business card. This may seem inconsequential, but if a court finds that a business owner has pierced the corporate veil, that owner will be personally liable.