When Are You Personally Liable for Your Business?

Being the owner of a US corporation, LLC or Limited Partnership is supposed to keep you safe, right? After all, that’s one of the reasons people form business structures in the first place – to protect against personal liability.

I wish that were always true, but it’s not. Here are a few ways you can wind up on the hook for your business’s problems, debts and misdeeds.

Acting as a General Partner

This applies to Limited Partnerships, Limited Liability Partners, and Limited Liability Limited Partnerships: If you are named as a General Partner personally, then you have personal liability. If the partnership can’t pay its bills, the debtor will be looking to YOU to make good. That puts your entire ownership in the LP at risk. If you’re wearing both hats – i.e., as a limited partner AND as a personal general partner, your assets aren’t really protected at all. Someone looking to sue the LP will sue you personally, and whatever you’ve got in the LP is at risk (along with all of your other assets).

That’s why we always recommend you use a corporation or an LLC to act as the General Partner. You can own the corporation or LLC – you can operate it, sign checks … pretty much everything you did as a personal General Partner you can do through a company. But what you DON’T do is expose yourself personally to liability. The corporation or LLC acts as a legal buffer. If the LP can’t pay its bills now, anyone suing the General Partner sues the corporation or LLC – not YOU personally.

Personally Guarantee a Business Debt

This one is pretty self-explanatory. If you provide a personal guarantee over a debt of your company then you’re stuck paying that debt if the company defaults. Watch out for credit cards in particular! Most credit cards issued to a business also contain a personal guarantee of the owner. If you’re asked to provide your Social Security Number or ITIN in connection with a credit card application, ask, or read the fine print, to make sure you understand what you’re getting yourself into.

Use the Business as an “Alter Ego”

It sounds a little bit like a superhero reference but there’s nothing super about being found an alter ego for your company. What it means in legal terms is that you aren’t separating yourself from the business properly. Maybe you pay all of your personal expenses out of the company account rather than writing a check to yourself for payroll or a distribution. Or you use your personal credit card for business expenses all the time. (Actually, if you do have to use a personal credit card, designate a single card for company use, and make sure you document it carefully). Or you pull money out of the company using a bank card, and use that for personal spending, rather than business expenses. The more you mix up your finances, the more you make the case for the other guy that your company is an alter ego and there’s no difference between you.

These are just some of the ways that you can accidentally break a hole in your asset protection barrier. We’ll be back tomorrow with some more examples.

At Smart Business Incorporation, we specialize in helping US investors and business owners develop structures to run their businesses, protect their assets and keep as much of their earnings as possible. If you want to know how to best structure your next business, visit our website or drop us an email at info@smartbusinessincorporation.com. We’ll be glad to help.

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