When Is a Business Owner Personally Liable?
Protecting your personal assets is likely one of your top priorities as a business owner. While many believe forming a business entity like an LLC or corporation shields them from personal liability, there are situations where this protection can be breached. Knowing when you could be personally liable is crucial to safeguarding your financial future.
Personal Liability in a Business Context
Personal liability occurs when business owners can be held responsible for the debts and obligations of their company. Typically, business structures like limited liability companies (LLCs) and corporations provide a legal barrier between the owner’s personal assets and the business. However, this protection is not absolute. Certain actions or situations can pierce that corporate veil and expose your finances to risk.
Common Scenarios That Lead to Personal Liability
Even if you have taken steps to incorporate or form an LLC, there are circumstances in which the court may disregard this separation between personal and business assets. These situations include:
- Fraud or Misrepresentation: If you engage in fraudulent behavior, such as misleading customers, creditors, or partners, you could be held personally liable. Courts are less likely to protect your assets when illegal actions occur.
- Co-mingling Personal and Business Funds: One of the fastest ways to lose liability protection is by mixing personal and business finances. Courts may rule that the business is not separate, opening the door for creditors to pursue your personal assets.
- Personally Guaranteeing Business Loans: Many lenders require personal guarantees on business loans, especially for small businesses. In these cases, if your business defaults on the loan, you will be personally responsible for paying it back, even if the business declares bankruptcy.
Personal Liability for Employee Actions
You may also be personally liable for the actions of your employees in certain circumstances. If an employee engages in illegal behavior, such as harassment or discrimination, and you fail to take proper precautions or ignore complaints, you could be held responsible. Similarly, if your business does not comply with labor laws, like failing to pay overtime, you may be personally liable for unpaid wages and penalties.
Torts and Negligence
If your business or its employees cause harm to others, you may be personally liable under certain conditions. This is especially true in cases where the business owner was directly involved in the negligent act. For instance, if a defective product from your company injures a customer and you are aware of the defect, you could face personal liability for damages.
How to Protect Yourself from Personal Liability
The best way to avoid personal liability is to take preventative measures from the start. Below are some key steps you can take:
- Form the Right Business Entity: Choose a structure that protects liability protection, such as an LLC or corporation. Follow the necessary formalities and maintain proper documentation.
- Separate Personal and Business Finances: Always keep your personal and business finances distinct. Use different bank accounts and do not pay personal expenses from your business funds.
- Follow Legal Requirements: Adhere to all laws, regulations, and formalities required for your business structure. This includes filing annual reports, holding required meetings, and maintaining accurate records.
- Avoid Personal Guarantees: Avoid personally guaranteeing business loans or debts where possible. If a personal guarantee is required, understand the risks involved.
- Carry Adequate Insurance: Consider liability insurance to protect against potential lawsuits or claims. This can be especially important in industries with a higher risk of legal issues, such as construction or healthcare.
The Philadelphia Business Lawyers at Sidkoff, Pincus & Green P.C. Protect Your Personal Assets
Personal liability is a serious concern for business owners, but it is possible to minimize the risks with the right precautions. By structuring your business correctly, following legal requirements, and keeping your personal and business assets separate, you can better protect yourself from financial exposure. Speak with the Philadelphia business lawyers at Sidkoff, Pincus & Green P.C. about how we can help you. Contact us online or at 215-574-0600. Located in Philadelphia, we serve clients in Pennsylvania, and New Jersey, including South Jersey.