How Do Business Owners Assure Limited Liability?

Limiting company liabilityWithout question one of the major advantages of doing business in the form of a corporation or a limited liability company is the limitation of liability for owners. Generally, shareholders of a corporation and members of a limited liability company enjoy limited liability. Their personal assets are generally safe from the claims of the company’s creditors so long as the company, whether a corporation or a limited liability company, is treated as separate from the owner.

Owners must keep the business entity affairs separate from their personal affairs.

Business funds must be used for business purposes and business funds must not be used for personal purposes. There are a limited few ways that business funds should be transferred or distributed to its owners: compensation/salary, rents for real estate or equipment, debt repayment, reimbursement for business expenses, and a dividend or other entity distribution. Otherwise, owners must not use business funds and must not take money from the business.

It is also important that the business of the company be conducted in the name of the business. All agreements, contracts, leases and the like need to be in the name of the business and not in the name of the individual owners. When one of the individual owners or officers signs on behalf of the business, the individual should make it clear that he or she is signing as a representative of the business.

When a business acquires an asset, it should use business funds. If it does not have sufficient funds, it must make arrangements for those funds from an outside source i.e. a bank loan, a loan from an individual (perhaps and owner) etc. The transaction should be properly documented to show the complete transaction.

If you fail to keep assets and accounts separate from personal assets and personal accounts, or if you fail to make a distinction between your personal affairs and the company’s affairs, you run the risk that a court will consider that your business entity is used as an “alter ego” or, in other words, a court may treat you and the business entity as one in the same.

To be sure that your business entity provides you limited liability:

  • Treat the business entity as “someone” different from you
  • Separate assets (business assets in the business name, personal assets in your personal name)
  • Keep business operations separate from personal affairs
  • Use the business name for the business and use your personal name for your personal affairs
  • All contracts and agreements should be in the correct names
  • Do not comingle money, assets or agreements

Author: Thomas J. Leonard, Esq.