Your Liability for Business Debts

As a small-business owner, you’d like to avoid being personally liable for business debts. You don’t want your home, car and investment accounts to be at risk. While each situation is unique, there may be actions you can take to reduce the risk of personal liability.

  • Choosing the Right Business Entity. Sole proprietors and partners are fully liable for all business debts. A better choice typically is to do business as a corporation or limited liability company (LLC). Either of these entities will significantly limit your personal liability. Even a business owned by just one person can operate as a corporation or LLC.
  • Maintaining a Separate Identity. If you form a corporation or LLC, don’t blur the line between you and the business. For example, always sign documents in the name of the company rather than in your own name. If you get careless, you may open yourself to the personal liability that you had hoped to avoid.
  • Using Insurance. Insurance is available to cover many common business risks. An insurance agent can help you select the right policy.
  • Handling Payroll Taxes. Whatever debts your business incurs, pay the payroll taxes first. These are the sums you withhold from employees’ paychecks for income tax, and Social Security and Medicare taxes. Promptly deposit these taxes with the IRS. Doing business as a corporation or LLC won’t protect you from liability for these taxes if your business runs out of money.

The attorneys at the Ann Arbor firm of Hamilton, London, & Davis can help you set up a corporation or LLC.

Categories: Business Law