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A common entrepreneurial mistake increases personal liability risk

On Behalf of | May 7, 2023 | Business Formation |

Starting a business comes with a lot of personal risks, and the process often demands weeks or even years of uncompensated work as someone builds their company from the ground up or develops a concept into a marketable product. The basic drive behind entrepreneurial endeavors is to generate revenue and is often to be one’s own boss. The possible rewards of this arrangement motivate people to invest all of that work upfront.

Still, people can’t overlook how starting a business comes with some degree of personal, financial and legal liability. The type of business somebody starts, the way that they run their organization and the insurance they carry can all help reduce liability. Unfortunately, especially if a company fails, the owner could still suffer on a personal level if their assets are not insulated from their company’s financial situation.

Oftentimes, collection attempts by creditors or plaintiffs in lawsuits against an insolvent company that try to hold an owner accountable will underscore one very common mistake in the early days of business development that may make an entrepreneur’s resources vulnerable to business-related claims.

Commingling blurs the line between personal and business assets

In the early stages of business development, people often try to keep the process informal and inexpensive. This may mean that they perform certain business operations using their personal financial resources, including their credit cards and checking accounts.

Unfortunately, using personal assets for business purposes, especially if there are other financial mistakes made in the future, can lead to future claims against personal resources in civil court. Business owners who want to simplify their early operations may create unnecessary risk for their personal resources by using their own bank accounts to cover business expenses.

Proper steps from the earliest stages grant the most protection

Every business creates risk for the entrepreneur starting the company. If the business fails, there could be a lot of debt left behind, to say nothing of the personal resources invested in the company and then lost when it fails. If a company faces lawsuits from former employees or customers who claim they got hurt by defective products, an entrepreneur might end up facing financial liability for any judgment granted to the plaintiffs.

Seeking legal guidance to learn more about the risks that people face when starting a business can help would-be entrepreneurs minimize their personal liability at the beginning of their business operations.