Starting a limited liability company (LLC) can provide the owner with a degree of protection. They do not have direct legal or financial liability for the company’s debts and can protect themselves if the company faces liability. However, that protection is subject to limits, especially in cases where the business becomes insolvent or outside parties bring successful lawsuits against the LLC.
In some cases, mistakes during the formation stage of creating the business may ultimately result in owners facing direct financial liability for organizational debts or judgments granted to creditors or other plaintiffs. What common mistake limits the protection an LLC provides?
Commingling resources is a common mistake
During the early stages of developing a business, people frequently use their own bank accounts or credit cards for company expenses. They may not establish a separate account for the business until the company starts generating revenue.
That failure to establish clear financial separation can have devastating consequences. It may allow creditors or other plaintiffs to “pierce the corporate veil” if the company doesn’t have the resources to compensate them.
They can ask the courts to hold the sole member who owns and operates the LLC accountable for a debt or for the judgment against the company. Cases involving financial misconduct, including commingling personal and business finances, can lead to the courts holding LLC owners accountable for company debts.
Taking appropriate steps when establishing an LLC, such as establishing a separate bank account, is critical for the protection of the owner starting the company. Working with an attorney can take much of the risk out of business formation. People with support during the startup process can avoid mistakes that could leave them at risk of personal liability in the future.
