False Security About Assets

Posted by: Rod Kurtz on January 9, 2006

Don’t assume that forming an LLC or corporation will always shield your personal assets. Even if you operate as a corporation or LLC, a creditor can still go after your personal assets if:

1. You personally guarantee a loan or lease. Since many lenders and landlords condition small-business loans and leases upon the business owner’s personal guarantee, the only way you could escape these debts is for the business and each owner seeking protection to file for bankruptcy.

2. You fail to pay federal or state taxes. If your business does not pay income, payroll, or other taxes, the IRS or the state tax agency can try to recover the unpaid taxes from you personally or from the other directors, officers, and owners of your LLC or corporation.

3. You act in a negligent matter. If you run a business subject to potential negligence claims — for example, an establishment open to the public or a manufacturer of consumer products — you can be personally liable for the damage. In these cases, buying insurance will usually do you more good than forming a corporation or LLC.

4. You fail to abide by corporate rules. If you don’t take corporate responsibilities seriously — for example, if you mix corporate and personal funds and don’t keep records of meetings and shareholders — a judge may strip away the asset-protection feature of the corporation or LLC. It’s called “piercing the veil.”

Richard Stim
Author, Whoops I’m in Business: A Crash Course in Business Basics
San Francisco

Reader Comments

fivekitten

January 19, 2006 7:55 AM

Thank you for the advice! Wish we would have read this earlier! We were under the belief that forming a corporation would protect us from personal liability and now we are learning otherwise.

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