How to Avoid Personal Liability When Running an LLC or Corporation?

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In order to discuss this topic, it's important to gain a basic understanding of the legal concept of "piercing the corporate veil." What this means is that in certain circumstances, when properly invoked, a court may "pierce the veil" of a corporate entity and hold the owners personally liable for the obligations of their corporation or LLC. It allows for a corporation's separate legal existence to be disregarded in order to prevent fraud and achieve fairness. This doctrine is often invoked by a third-party seeking to circumvent the limited liability that is afforded to owners and hold them liable for corporate obligations.

Under normal circumstances, owners of corporations and LLCs enjoy the benefits of limited liability and for the most part, avoid personal liability by running their businesses legitimately. When we talk about personal liability, this means that you would be held personally responsible for debts and liabilities of the corporate entity. When someone is held personally liable in a litigation, their private homes, vehicles, bank accounts, and other assets are available to the prevailing party in order to pay out their claim against the corporate entity owner.

In order to reduce your chances of being exposed to personal liability, it is important to treat your corporation or LLC entirely separate from your personal affairs. Some factors that are considered when determining whether an owner has abused the privileges of doing business in the corporate form include:

Complete domination of the corporation by the owner, where it is used merely as a device to further their own personal, rather than business interests;
Failure to adhere to corporate formalities, such as:
- Drafting an Operating Agreement (LLC) or Bylaws (Corporations),
- Holding regular board/shareholder meetings,
- Setting up a corporate bank account,
- Maintaining a stock ledger and issuing stock certificates,
- Filing corporate taxes,
- Securing liability insurance,
- Maintaining accurate financial records; and
- Obtaining proper licenses and permits to conduct business;
Commingling of personal and business assets;
Conducting business in the owner's personal capacity;
Using corporate funds for personal use;
Inadequate capitalization: Corporate debts far exceed income/assets and the corporate entity is unable to pay its debts

Running a business can be a stressful, but rewarding experience. However, when someone chooses to use their corporate entity for their own personal benefits, they are taking a huge risk towards being held personally liable and losing their business altogether. If you avoid the pitfalls of mixing personal and business interests and follow the standard corporate formalities, you are in the best position to carry on your legitimate business and prevent unnecessary exposure to personal liability.

Disclaimer: This blog post and similar posts are not to be considered as providing legal advice. The discussion here is meant for educational and informational purposes only and shall not create an attorney-client relationship with the readers of this content.