When incorporating can’t protect personal assets

March 17, 2015

Sharp business owners know that there are numerous benefits of incorporating, so much so that it is an essential part of entrepreneurship. Incorporation can lower tax bills, ensure business longevity and increase legitimacy in the eyes of investors and the public. Of course, one of the biggest reasons to incorporate is to protect personal assets from liability. Losing your entire life savings due to business issues is the stuff of nightmares, and forming a limited liability corporation goes a long way toward alleviating that particular stress.

Of course, incorporating is not necessarily the end-all-be-all of personal asset protection. There are a number of circumstances where you may still be held personally liable for what happens in your corporation. Being aware of these situations is the first step to understanding and avoiding them.

Have you personally guaranteed a business loan? 

New business owners may be asked to personally guarantee bank loans until a company is able to build its own credit. Signing a personal guarantee for a loan means agreeing to personally pay the loan back if the business is unable to. This means that you have given up your limited liability for that particular debt, even if your company is incorporated. If things take a turn for the worse and your business can’t make payments on a loan you will be held responsible.

It is best to avoid signing personal guarantees for business contracts wherever possible.

Did you sign a contract in your own name?

This is a scarily easy way to lose limited liability by mistake. How you sign purchase agreements and business contracts can be the difference between your assets being protected and being at risk. If you sign as an individual — Jane Doe, for example — you have agreed to be personally liable for the debt. Signing the contract as a representative of the company — Jane Doe, CEO of Doe Dealership — makes the business liable.

This is a terrible way to lose asset protection because it is a result of pure carelessness. Always sign business documents as an officer of the company.

Did you fund a purchase with a personal credit card?

New entrepreneurs will find that it can be difficult to untangle the twisted web of personal and business finances. Starting a new company often means dipping into your own resources. While it might seem normal to pay for a business expense with your credit card, this makes you personally liable for any debt.

Often times it does not matter whether your business’s name is on the card or not. It is imperative to check the terms of the credit card application you sign before using a card with your name on it to make purchases you do not wish to be personally liable for.

Did you commit a crime?

Protection from personal liability might seem great if you are planning on becoming a criminal.  However, in the case of corporations and LLCs you would be out of luck. Incorporating does not protect you if you break the law. Also, if you lie about yourself or your business on a credit application for your company, chances are you will be held personally liable for the debt.

Have you kept your corporation in compliance?

There are a number of formalities and filings that you must be complete for a corporation to continue existing. Make sure you are reporting regularly to the state to avoid non-compliance, which can negate the protections of incorporating.