A huge advantage to incorporating or forming an LLC is that it protects your personal assets from business debts. But creating the corporation or LLC isn’t enough—you have to make sure you don’t waive that protection.
One way to waive that protection is to take actions that suggest you’re willing to be personally responsible for the corporation’s debts. Below are four of the most common ways business owners can, intentionally or otherwise, assume responsibility for their business’ debts:
- Signing a personal guaranty. By signing, you’re taking responsibility for paying the loan if the business can’t. Many banks require one, especially for new businesses. As you develop a good history with the banks, you might be able to get them to waive this requirement. Make sure to keep track of any personal guaranty.
- Offering personal property as collateral. A creditor can go after collateral, even if it’s your personal property. Just like with personal guaranties, a bank is more likely to require this for new businesses. Again, make sure to keep track of what you offer as collateral.
- Using personal credit cards for business expenses. You are always responsible for paying your personal credit card balances. The card company doesn’t care if you used the card for “business purposes.”
- Signing a contract personally. Always make sure you indicate you’re signing as a representative of the company (ex. President, CEO, etc.). If you just put your name on the dotted line, people will assume you’re signing as an individual and plan to be held individually responsible for the contract.
Corporations and LLCs offer great protection for business owners, but that protection isn’t absolute. Being aware of how you can become personally liable for your company’s debts can help you minimize your risk and realize all the advantages incorporating has to offer.