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The big mistake many entrepreneurs make when starting an LLC

On Behalf of | Mar 3, 2022 | Business Law

Being an entrepreneur means taking a lot of risk. You have to invest your time and money in the idea before anyone else will take it seriously. You may have to quit your job to get the company off the ground, forcing you to live off of savings.

All of that risk may amount to little payoff. Many businesses fail even if they are based on a great idea. Business owners can be personally liable for the debts their business accrues or legal claims made against the company. Creating a formal business structure is a way to protect yourself when you start a new business.

A limited liability corporation (LLC) is a popular tool for entrepreneurs hoping to protect themselves and their assets when starting a new business. By creating a separate legal entity, the owner shields themselves from legal action that could make their future wages or personal property vulnerable. Unfortunately, a simple mistake early in the process may undo that important layer of protection.

It’s dangerous to mix personal and personal finances

When a business owner or executive uses personal assets for the business or business assets for themselves, people refer to that practice as commingling. The risk in such actions is that they make your personal property vulnerable to claims against the business.

Your former employees or creditors could ask the courts to pierce your corporate veil and hold you personally accountable for whatever they want to claim from your company. When your financial records expose a history of commingling, a judge may agree to pierce the corporate veil and allow creditors or civil plaintiffs to take action against your property or future income.

How do you avoid commingling?

Having the right support early in the business startup process is crucial to avoiding these kinds of basic mistakes. Creating separate accounts and having the right paperwork can go a long way toward reducing your risk of a lawsuit against your business affecting you personally. When you know what risks come from starting a company, you can do a better job of protecting yourself from them.

Getting help and accurate information as an entrepreneur can minimize risks when starting a new business.