Avoiding Personal Liability for Business Debts and Claims

Every business is subject to liabilities. Essentially, you want any such liabilities to be the responsibility of the company and to not result in a personal liability. The type of business structure you choose will determine how vulnerable you are to personal liabilities.

For example, if you are a sole proprietorship, you are liable for all debts and claims against the business. A lawsuit could be financially devastating. However, if you have taken the time and effort to incorporate or to form a Limited Liability Company, then you will likely be protected to a significant degree from such personal liabilities.

Many business owners, however, are under the mistaken impression that they are completely protected from personal liability by filing Articles of Incorporation, for a corporation. This is not true. The mere process of incorporating does not completely protect the business owners or shareholders. To lessen the likelihood of such personal or shareholder liability you should make sure to adhere to certain procedures. You should:

Always use the corporate name: The name of the corporation should be used in full, including "Inc." or "Corp." on all contracts, invoices, or documents used by the corporation. This clearly indicates the existence of the corporation as a separate entity.

Always use proper signatures: This means that you will sign on behalf of the corporation, using the name of the corporation and your title. You should typically use the following format when signing contracts on behalf of the corporation:

CORPORATION NAME

By: ___________________________________

Your name — authorized signing officer and corporate title

Follow all corporate formalities: This includes following Bylaws, proper issuance of stock, holding meetings of the Board of Directors, recording of the minutes, and other corporate formalities.

Make sure to keep funds separate: Corporate funds and the funds of individual shareholders should not be in the same accounts or combined for any reason.

Make sure to keep taxation separate: The corporate taxes should be paid entirely from corporate accounts.

Keep all transactions separate: All transactions made by the corporation should be clearly separate from any individual transactions.

Essentially, by never blurring the line between individual shareholders, owners or the Board of Directors, and the corporation — which stands as a separate entity — you minimize the risk of incuring any personal liabilities.