Starting an LLC or corporation is a smart move to protect yourself from personal liability, but many business owners assume the job is done once the paperwork is filed. In reality, liability protection is not something you create once and forget about.
If you don’t maintain the legal separation between yourself and your company, it can weaken your liability protection. Your personal assets, like your home or bank account, could be at risk. Here’s how you can avoid this.
Keep business and personal finances separate
Don’t mix personal and business money, and avoid paying personal expenses from the company account or depositing personal funds without proper documentation. Otherwise, you may blur the legal line between your personal identity and the business entity. Using a dedicated business bank account, business credit card and accurate bookkeeping can help maintain clear financial boundaries and preserve your liability protection.
Stay properly capitalized
Your business should have enough funds, insurance and resources to operate responsibly. Running an underfunded company while taking on debts can raise red flags. Courts sometimes look at whether the business was set up as a real operating entity or merely a shell.
Stay current on filings and formalities
It’s equally important to respect legal formalities. Depending on your entity type, that may include
- Maintaining an operating agreement or bylaws
- Recording major decisions in written resolutions
- Holding required meetings
- Keeping ownership records updated
- Filing annual reports on time
Ignoring internal procedures can create unnecessary legal and financial risks, potentially putting your liability protection on the line.
Sign contracts the right way
Always sign contracts in the name of the business, making it clear that the company is entering the agreement. Otherwise, you may unintentionally accept personal liability for the obligations in that contract if you sign in your name or fail to identify the company correctly.
It’s worth noting that the legal requirements for preserving liability protection can vary based on your business entity and specific circumstances. What may be sufficient in one situation could fall short in another. Maintaining that protection often requires ongoing attention to detail and regular review as your business grows and changes.
