As a business owner, you may be held legally responsible for business debts, lawsuits or obligations. This is especially common in sole proprietorships and general partnerships, where there is no legal separation between you and the business. Your savings, your home and even your future earnings could be at risk if something goes wrong.
Most people believe they are protected simply because they formed a limited liability company (LLC) or a corporation. While such structures can offer protection, it’s not absolute. You may still be personally liable for certain actions.
Common situations that trigger liability
Personal liability can arise in various ways. For instance, if you mix personal and business finances, you may lose the legal protection of your business structure. Texas courts have the authority to ‘pierce the corporate veil’, meaning they can look past your LLC or corporation and come straight to your personal assets. If your business account doubles as a personal ATM, you’re already at risk.
Signing contracts in your personal name and personally guaranteeing business loans or leases are also common triggers. You may be treated as a party to the agreement in your individual capacity, which makes you directly responsible if your business defaults.
You may also be held personally liable for failing to carry adequate insurance for your business, especially in high-value claims where recovery surpasses the company’s available assets. Similarly, you can be individually responsible for engaging in negligent or wrongful conduct, regardless of the business entity.
How to protect yourself
The good news is that personal liability is largely preventable with the right strategy. Forming the appropriate business entity, maintaining clear financial separation, and doing everything by the book can all go a long way. Working with the right legal professionals can help you structure your business properly and ensure your liability protection holds up if challenged.