The protection of personal assets is a major concern for many who are starting a business. Building a new company often requires tremendous personal sacrifice to begin with. Knowing that future challenges within the business may further jeopardize one’s personal finances may be a frightening prospect that could easily dissuade an entrepreneur from starting a new venture.
However, with the right business entity, California business owners may separate their personal assets from the assets of the business. Limited liability companies and corporations are two examples of entities that separate the liability of the business from the liability of its owner or shareholders. Choosing one of these entities may give you some peace of mind, but it is important that you understand the circumstances under which you may still hold personal liability.
Personal assets at risk
Problems in your business do not have to place your home, savings and other assets in danger. If you have established your business as an LLC or corporation, you may have some protection against those seeking damages they believe your business owes them. Many in the business world refer to this protection as the corporate veil. Nevertheless, it is possible to pierce the corporate veil, placing your assets at risk when your business is in trouble.
You or your shareholders may be protected by the corporate veil from lawsuits unless those claims involve fraudulent actions. For example, if you fail to pay state and federal payroll taxes, use the business credit card for personal reasons, or divert assets from the business to your personal accounts, you may pierce the corporate veil.
Issues with debts
Keeping the debts of your company separate from your personal responsibility is critical since business debt can be overwhelming. However, if you comingle your personal assets with the business funds, a court may decide you have dissolved the separation between you and your business entity. Additionally, actions like failing to keep accurate financial records, personally signing for business loans, or using your home or other private assets as collateral for business loans may place you at risk in a lawsuit or other creditor actions.
Having a skilled attorney work with you from the early stages of the creation of your business may improve your chances of avoiding costly litigation in the first place. But if you should face the possibility that your personal assets will be fair game in a business lawsuit, you will certainly want quality and experienced legal representation.