Business owners tend to keep their personal money and property separate from their business money and property. You and your partner may have worked hard to purchase a home, cars, and other valuables, and you may want to ensure all of those are protected in case your business is sued for any reason. However, you may not be sure if this is even possible. Here is more information about your personal property and what happens if your business is being sued.
Is My Personal Property at Risk If My Business is Being Sued?
The number one factor that affects whether your personal property is at risk if your business is being sued is how your business is set up. There are different types of businesses out there, and simply put, some may put your personal property at risk, while others may not.
If you have a sole proprietorship, your personal property is at risk if your business is sued. A sole proprietorship does not shield your assets and protect you from personally being held liable for any lawsuits you face. If you have a sole proprietorship, purchasing commercial business insurance that protects you against lawsuits is the best way to help protect your assets and minimize their involvement in a lawsuit.
Just like sole proprietorships, general partnerships do not shield and protect assets. One of the worst things about a general partnership is that if the business is sued, they may go after any of the partners, so if you have the most assets, they will likely come after you before touching partners with fewer assets. Once again, purchasing commercial business insurance that protects against lawsuits can help protect some of your assets, but ensure the insurance policy does not have a low maximum payout, or you could wind up having to pay the difference yourself.
Limited Liability Corporation
A limited liability corporation is the only type of business that shields your personal property. As such, if you have assets, and you want to protect those assets and/or keep them separate from your business, it is strongly recommended that you form a limited liability corporation, also commonly referred to as an LLC.
Are There Exceptions for Protecting Personal Property?
While an LLC typically shields your assets and protects your personal property if your business is being sued, it will not protect your personal property in every instance. There are a few situations where the protection granted to your limited liability corporation can be null and void and you can be held personally responsible. If you are held personally responsible, your personal property and assets are at risk.
Making Personal Guarantees
To protect your personal property and assets, you have to avoid making personal guarantees for the LLC business. This means you cannot take out loans in your name or co-sign for a business loan using your personal credit or name. If you make personal guarantees, you run the risk of your personal property is at risk if you default on those loans. Always keep all loans under the LLC name and the tax identification number associated with the LLC, rather than your own personal name and social security number.
Not Acting As an LLC
To be protected as an LLC, your business must run and operate as an LLC. For example, many sole proprietorships mix personal and business money. They may take their home mortgage payment directly out of their business bank account and pay both personal and business bills out of the business account. As an LLC owner, you must pay yourself a salary, rather than just taking money as you need it, and cannot mix your personal and business money. If you are not acting as an LLC, you may not be protected like one.
Environmental Clean-Up Fines and Fees
As a business owner, you are required to follow all environmental laws. There may be specific rules and laws pertaining to how items in your business should be disposed of or how certain chemicals need to be cleaned. If you fail to follow these laws, and a professional company needs to be called in to clean up the hazardous mess you made, you, as well as any current or past LLC members who had a hand in how hazardous materials were improperly disposed of, can be held personally liable for the clean-up costs.
Negligence, Fraud, and Illegal Acts
Finally, being an LLC does not shield you personally from any negligence, fraud, or illegal acts that you and your business commit. For example, if you assault an employee during business hours, you can not only be held criminally liable but both you and your business can be sued and held liable. An LLC will never shield you from any illegal acts, fraudulent acts, or acts that a judge or jury deems to be excessively negligent.
Is There a Way to Protect Your Personal Property as a Business Owner?
If you have any assets or personal property, it is strongly advised that you talk to a skilled business lawyer before starting a business. A business owner can help you determine the best way to protect your personal assets when forming a business. In addition to protecting your assets, they can help you to understand the differences between the various business types, what rules must be followed to be deemed an LLC, and how to avoid personally guaranteeing anything when you are starting up a new business.
Talk To an Attorney When Forming Your Business
If you are forming a business, it is important to talk to an attorney. In most cases, the way your business is classified affects whether your personal property is at risk. What this means is that once you are sued, you cannot change the way your business is classified to protect your personal property; this must be done before being sued. As such, you must talk to the attorney as the business is being formed to ensure you fully protect your personal assets.
Talk to An Attorney Upon Being Sued
Once you are sued, it is still important to talk to a business attorney, even if you are an LLC. There are a few factors that will eliminate the shield an LLC offers you, and in which you can be held personally responsible. If your business does not have a lot of assets, but you personally do, there is a good chance the other attorney will try to show the reason why you should be held personally liable to get money for their client. A great business attorney can work to show why you should not be held personally liable and why the LLC to shield of protection should be upheld. If you are looking to start up a new business, or if you have an existing business but are not sure if your personal property is protected, reach out to a skilled business lawyer. Here at Weisblatt Law Firm, we can help you with all of your business law needs, including helping you protect your assets and defending you against any lawsuits that are filed. Reach out to us today to discuss your specific needs and what we can do to help you.
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