Entrepreneurs take a lot of risks when they start a new business. The company could fail, leaving them with big debts they have no way of paying. A product could have issues that cause customer injuries, or an employee could file a lawsuit over alleged discrimination, possibly leading to a massive judgment.
Setting up a limited liability corporation (LLC) is a simple way for you to start a company without putting your personal property and future income at risk. However, the protections that an LLC offers only apply in certain situations.
If you make certain crucial mistakes when starting your company, you might endanger your personal assets if there are issues with your business in the future. Specifically, you need to make a concerted effort to separate your business finances from your personal finances.
Commingling puts your personal accounts and assets at risk
When you use business accounts for personal purposes or personal accounts for the business, your behavior constitutes commingling. Commingling can open the door to personal liability. If the company fails later or faces lawsuits brought by clients unhappy with your services or customers who claim your products injured them, the company’s resources may not be enough to pay the judgment that results.
If you previously commingled personal and business finances, your creditors or those who have a judgment against you could ask the courts to pierce the corporate veil. They can then hold you directly accountable for the debts owed by your company or the judgments against your business. Your personal property and income could be vulnerable at that point.
Recognizing commingling as a risk when starting your company can help you avoid this all-too-common mistake.