Limited liability within a business context means that creditors – including people who sue your company – can only reach the assets of the business. Corporations and limited liability companies (LLCs) offer limited liability to their owners.
There is a concept called piercing the corporate veil or setting aside limited liability. When that happens you lose the limited liability offered by a corporation or LLC and your personal assets become vulnerable to creditors. A set-aside of limited liability can occur if the company is undercapitalized, if you co-mingle personal and business assets, or if you don’t follow certain formalities mandated by state law or your own organizational documents.
To minimize the risk of a set-aside of limited liability, companies should do the following:
- Follow the procedures specified in your bylaws, operating agreement, or other organizational documents.
- Keep your personal assets and financial records separated from business assets and financial records. This includes setting up a separate bank account for the company and paying company bills from the company bank account. Also, if you pay business expenses by credit card, it’s helpful to obtain a credit card issued in the company’s name.
- Make sure it is the company and not the individual owners that is listed as the contracting party for all contracts dealing with the business.
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