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Avoiding Personal Liability for Business Debts

It is impossible to operate a business without creating business liabilities. One of your primary business objectives should be to keep those liabilities as the sole responsibility of the company and prevent them from becoming your personal liability as an owner.

The type of business structure you choose will determine how vulnerable you are to personal liabilities. For example, if you operate your business as a sole proprietorship or a general partnership, you are liable for all debts and claims against the business. A lawsuit could be financially devastating. If you incorporate your business or form a limited liability company, you will have substantially more protection from personal liability for your business liabilities.

However, many business owners are under the mistaken impression that they are completely protected from personal liability by filing a certificate of formation for a corporation or limited liability company. Unfortunately, this is not true. The mere process of incorporating does not completely protect the business owners or shareholders. It is simply the first step.

You must complete the formation of your business by adopting internal organization documents, commonly called bylaws or regulations and you must actually operate your business through the new business entity. When conducting business, you should always use the name of your business entity, not your name. This is especially true when entering into contracts or invoicing a customer. You should also use a proper signature making sure that you are signing in your capacity as an officer or owner of the business and not in your individual capacity.

Your new business should also have a tax identification number and a bank account separate from your personal account. As a general rule, if you blur the boundaries between your business and yourself and do not treat the business as a separate entity, your creditors will also be extended that privilege and you may loose your liability protection.