Article By: Kevin Corlew
December 2, 2021- Small businesses owners often ask how they can limit their personal liability. In other words, if someone were to sue the small business and obtain a legal judgment against the company, could the plaintiff reach the owner’s personal assets (e.g., bank account, home, or automobile) to satisfy the judgment?
The legal answer is (like all legal answers) “it depends,” on a variety of factors. But there are steps that small-business owners can take to limit their exposure to personal liability. Here are seven:
Choose a business entity that provides limited liability. Various legal entities provide limited liability to owners. In the case of a corporation, for example, a shareholder’s liability normally is limited to the amount the shareholder has invested. In a limited liability company (“LLC”), a member normally is liable only for the amount of his or her capital contribution. Small businesses often prefer the LLC structure because it provides limited personal liability, offers governance and management flexibility, and allows the company to elect how it will be taxed—i.e., as a pass-through entity or as a C Corporation. Even with limited-liability entities, however, court decisions hold that the “veil” of the corporation or LLC can sometimes be “pierced,” so as to make the owners personally liable for the company’s debts. To avoid this, the small business owner should not only choose a business entity that provides limited liability but also should take these other steps.
Keep accurate and organized financial records. Using a good accounting/financial management software is recommended.
Do not commingle business and personal funds and accounts. In other words, run your business like a business. Keep your business assets and personal assets separate. Maintain distinct records of each (see #2 above).
Obtain general liability insurance. Depending on your business, you’ll need varying amounts of insurance through a commercial general liability (CGL) or a professional liability (malpractice) policy. Talk to a good insurance agent about what’s available.
Do not sign personal guarantees. In the early days of a company’s existence, a bank or other lender may require a personal guarantee from the owner. Still, a small business owner should do so only after careful evaluation of the alternatives and negotiation as to the amount (monetary) and duration (time) of the personal guarantee.
Document business actions. This is somewhat akin to #2 above, but also has to do with keeping records of business dealings or transactions, company decision-making (e.g., minutes of board meetings), and utilizing and maintaining written contracts.
Consult a business lawyer. An attorney can help you choose an entity structure that achieves your business objectives while limiting your personal liability; advise you on how to operate the company in such a way as to limit liability exposure; and, if litigation arises, advocate in court to protect your interests or negotiate a fair settlement.
Disclaimer: This communication is for informational purposes only and neither provides legal advice nor forms an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely upon advertisements.
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