Q: Can I ever be held personally liable if my business is set up as a corporate entity?

—Prudent Principal

A: Dear Prudent:

When properly created and maintained, entities such as an LLC or S Corporation, can shield your personal assets from creditors, lawsuits, and other disputes incurred by your business. However, the personal liability protection afforded by these entities is not absolute.

There are several circumstances in which a creditor can come after your personal assets to settle a claim against your business. When this happens, it’s known as “piercing the corporate veil.”

While the corporate veil can be pierced if you commit fraud or negligence, in most cases, it happens due to innocent mistakes. These errors can include inadvertently mixing your personal and business finances, personally signing off on a business loan, or failing to abide by administrative formalities.

And while a corporate entity can protect your personal assets from liability, these legal structures do not offer any protection for your business assets. To safeguard your business assets, you’ll need to invest in the proper business insurance, which is always your business’ first line of defense.

By working with a Family Business Lawyer™ on an ongoing basis, you can ensure you are maintaining your corporate shield by handling your business affairs properly, keeping its assets separate from your personal ones, and checking in with them before you sign any contracts or agreements on behalf of your business.