I receive a lot of questions from business owners about how to limit personal liability. Unfortunately, many of these questions come after a mistake has been made. Benjamin Franklin once said, “an ounce of prevention is worth a pound of cure.” Although Franklin was using this axiom in the context of fire safety, it applies universally.
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 they believe has “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 they are passionate about. Having the correct business structure and upholding good business practices can give you peace of mind that you will not be 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 with the state. Two or more individuals can start a business as a 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 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 have a client who I’ll call Todd who had to change his business practices to regain the liability protection of his LLC structure. Todd builds homes for a living and runs his business through his LLC. Todd was opening himself to personal liability by commingling funds (using business funds for personal use). Todd would pay for everything with the business account because that was where the money was. This may seem inconsequential, but if a court finds that a business owner has pierced the corporate veil by commingling funds, that owner will be personally liable. It isn’t easy to change habits, but it is important when protecting your family and business.
If you are thinking about starting a business, restructuring your business, or improving your business practices, give me a call!