Forming an LLC or corporation is often the first step business owners take toward protecting their personal assets — but the protection isn’t automatic or absolute. Understanding both what liability protection actually covers, and the common ways it gets undermined, is essential to making it meaningful.
What Limited Liability Actually Protects Against
Properly maintained, an LLC or corporation generally shields owners’ personal assets from:
- Business debts and contractual obligations the entity enters into
- Lawsuits arising from the business’s operations (a customer injury, a contract dispute)
- Claims against the business that don’t involve the owner’s personal conduct
What It Does Not Protect Against
- Personal guaranties — as discussed in our articles on lease guaranties and franchise guaranties, a signed personal guaranty creates direct personal liability regardless of entity structure
- Personal misconduct — an owner is personally liable for their own negligence, fraud, or intentional wrongdoing, even when acting on behalf of the business
- Unpaid payroll taxes — certain tax obligations carry personal liability for responsible parties regardless of entity structure
- Piercing the corporate veil — a legal doctrine allowing courts to disregard the entity’s liability shield under specific circumstances
Piercing the Corporate Veil: How Protection Gets Lost
Courts can “pierce the corporate veil” and hold owners personally liable when the entity hasn’t been properly maintained as a separate legal person from its owners. Common factors that increase this risk:
- Commingling funds — using business accounts for personal expenses, or vice versa, without clear separation
- Undercapitalization — operating the business without adequate capital or insurance to cover foreseeable liabilities
- Failure to maintain formalities — for corporations especially, skipping required meetings, minutes, and recordkeeping
- Fraud or misrepresentation — using the entity structure to perpetrate a fraud or evade an existing obligation
Practical Steps to Maintain Liability Protection
- Maintain separate bank accounts and never commingle personal and business funds
- Keep accurate financial records and maintain adequate business insurance
- Follow the formalities required for the entity type — an operating agreement for an LLC, minutes and bylaws for a corporation
- Sign contracts in the entity’s name, with a clear signature block indicating the signer’s role (e.g., “as Manager,” not just a personal signature)
- Adequately capitalize the business relative to its operations and foreseeable risks
Insurance as a Complement, Not a Substitute
Liability protection through entity structure and adequate business insurance work together, not as alternatives. Even a properly maintained entity can face claims that exceed what the business’s assets could cover — appropriate general liability, professional liability, or other coverage specific to the business’s operations remains essential regardless of entity structure.
Concerned about whether your business is actually protecting your personal assets the way you think it is? Brent A. Levison, P.A. helps business owners review and strengthen their liability protection. Contact the firm today for a consultation.
The information in this article is provided for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please consult a qualified attorney.