Checklist for Limiting Personal Liability When Running Your San Diego Business
When you are in business, there are many steps that you can take to limit your personal liability and your family’s liability for business debts and obligations. We here at San Diego Corporate Law can help you with any of these strategies. Here is a quick checklist on the steps to take.
San Diego Corporate Law: Form a California Corporation or LLC
When you run your business as a sole proprietorship, you are personally responsible for any business debt or obligation. Many tend to think of “debts” as bank loans and credit card charges. Those are, of course, debts. Businesses incur many other types of obligations. If you have a lease and you move your business or stop operating your business, the obligations under the commercial lease can become a “debt” at some point if there is litigation for which you are personally liable. It is certainly an “obligation.” The same can be true for purchased inventory, money owed for workers and services, utilities and supplies, and many other necessities for running your business. You are personally on the line to pay these obligations. The same is true for various types of partnerships.
However, by forming a California corporation or limited liability company, you can shield personal assets. There are several necessary steps. First, you should have a talented and skilled San Diego corporate attorney help you form the corporation or LLC. Then, as you run your business, make sure you use the corporation correctly. Sign all contracts “as President,” do not put personal assets into the corporation, do not willy-nilly take money and assets out of the corporation or LLC, NEVER co-mingle corporation funds with personal funds (separate bank accounts), use corporate letterhead, and more. In short, maintain the corporate formalities and treat the corporation or LLC as something separate and apart from yourself.
San Diego Corporate Law: Avoid Signing Personal Guaranties
Aside from shielding personal assets with a corporate entity, you should avoid completely, if possible, signing any business-related contract that contains a personal guaranty. Personal guaranties put your personal assets at risk. Among the steps to be taken:
- Carefully read any and every contract — sometimes the personal guaranty is “buried” in the “fine print”
- Sign every contract in your corporate capacity — if you fail to sign “as President,” a creditor could argue you signed as an individual and argue you are personally liable
- Negotiate to eliminate any proposed personal guaranty
- Find another supplier, landlord, etc.
San Diego Corporate Law: Maintain Your Business Insurance
If there is a slip and fall at your business or a fire occurs or a lawsuit is filed claiming discrimination or something similar, the plaintiffs will often sue business owners and employees. Having insurance that covers such claims will help cover the costs of litigation. Often, such insurance will defend lawsuits when you are personally sued. As such, you avoid having to use your personal assets to hire and pay the lawyers. Make sure that you have Director & Officer liability insurance too (“D&O insurance”). D&O insurance protects your personal assets if you are ever charged or accused of violating your corporate duties and responsibilities.
San Diego Corporate Law: Pay All Taxes and Forward All Withholdings
Basically, any local, state, or federal taxing authority has enacted laws that make you, as the business owner, personally liable for tax liabilities. These include
- Sales tax
- Payroll tax withholdings for employees
- Other withholdings — like for union dues
- Personal income tax
- Corporate income tax
- Fees and penalties
- Use tax
- Property tax
- And more
To be clear, the corporate form will not shield you from tax obligations. The government at all levels can reach through the corporate shield and reach your personal and family assets. You cannot even file bankruptcy on government-owed taxes.
Contact San Diego Corporate Law Today
If you want more information, seek the guidance of an experienced business attorney like Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard can be reached via email or by calling (858) 483-9200.