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The mistake entrepreneurs make that leads to personal liability

On Behalf of | Dec 20, 2023 | Business Formation & Planning

When starting a new business, many entrepreneurs specifically create limited liability companies (LLCs) to shield themselves from personal financial risks. They do not want to be financially responsible for the business’s debts or leave their assets at risk if someone sues the company for a defective product or other issue.

Formal business structures can help reduce the risk involved in starting a new business. Unfortunately, a very common mistake that people make when starting a company may undermine the protection that an entrepreneur has from personal financial liability when the company faces a lawsuit or has debt that it cannot pay. How do entrepreneurs unknowingly endanger their assets during the startup phase?

They commingle financial resources

During the early stages of a business startup, entrepreneurs might use their personal credit cards to pay certain expenses. They might use their personal checking account to cash the first few checks that they received from clients.

Although this may seem like a way to delay starting separate financial accounts, it is actually a serious mistake. Commingling personal assets with business resources could lead to personal financial responsibility for business obligations in the future.

Plaintiffs suing the business could ask the courts to “pierce the corporate veil.” If a judge agrees that a review of company finances shows certain mistakes occurred, like financial commingling, they can hold the owner personally responsible.

An individual’s future income and personal assets could be at risk if they do not carefully maintain separate finances for themselves and the organization they start. Learning from the mistakes of others and getting the right legal support can help reduce the risk inherent in an entrepreneurial endeavor.