You’ve probably heard it before. Heck, you may have even incorporated your business under this assumption: corporations limit personal liability.
While this is certainly true, there’s a little more to it than that. As is the case so often in legal matters, the situation isn’t always cut and dry – in fact, it rarely is. And it’s the same for corporations.
Limited Personal Liability – Defined
Limited personal liability refers to the fact that an owner’s personal assets are protected from the corporation’s creditors. If, for instance, you own the corporation and you find yourself facing a court judgment which states that your company owes a creditor $100,000, the courts cannot force you to use personal assets to pay the debt (such as your car, house, investments, etc.)
Only the corporation’s assets must be used to pay outstanding debts, so essentially, you only stand to lose whatever amount you invested in the company.
Personal Guarantee = No More Limited Personal Liability
Although there are several instances in which your personal liability is at risk regardless of the fact that your business is incorporated, one of the most common mistakes corporation owners make is personally guaranteeing bank loans or supplier contracts.
It seems harmless, but such actions instantly and completely void any limited personal liability your corporation once provided. In the event that your corporation defaults on such financial or business arrangements, and if the issue escalates into a legal matter handled by the courts, you may be ordered to pay your debts using personal assets.
Other Ways to Put Your Limited Personal Liability into Question
As the owner of a corporation, it’s wise to make yourself aware of the other ways you can risk exposing yourself personally. These include:
- Improper signing of legal documents on behalf of the corporation
- Negligence, fraud or other illegal actions
- Acting in ways that “pierce the veil” of the corporation (i.e. comingling funds, using business assets for personal use without proper documentation, failing to keep required corporate records)
When you’re informed, you’re able to make better decisions as the owner of your corporation. To make sure you’re protected and acting in the best interests of your company, consider speaking to a corporate lawyer who can help you understand the legalities and advise you on a wide range of business matters.