TOS 07: 4 Mistakes Small Business Owners Make that Put Their Personal Assets on the Line (Limited Liability Protection Part 3)

Many small business owners incorrectly believe that once they've received the certificate of formation from their secretary of State's office, they have nothing else to worry about. They think that all of their non-business property is protected, however, that belief is wrong. Losing Limited Liability protection is a lot easier than obtaining it. Here are 3 ways a business owner can lose his or her limited liability protection.

#1. Treating Your Business Account like a Personal Account 

This is also called commingling funds. If you as a small business owner do not keep your business property and your personal property clearly separate, the government is going to take a way your limited liability protection. They expect you to treat your business like something separate from you (and as an aside, you'll need to develop this mindset if you want your business to grow, but we won't go there today.) 

Be sure to avoid doing things like buying personal property with your business funds and business items with your personal funds. If you do choose to do so, keep clear records. Pay yourself back. Track everything. If you are gifting your business with anything, treat it like an investor down the street is gifting you. Another thing to avoid is allowing clients to pay you the individual rather than the business. KEEP it separate! Cut the umbilical cord. Let your business be its own person. 


Most of your limited liability entities have record keeping requirements. The most stringent requirements are associated with Corporations which typically mandate meetings, personal, and other documentation. If you create an limited liability business, but do not adhere to any of the requirements, the law will ignore your protection. There are numerous cases where the judges will say a company is right about legal issue, but will rule in favor of the opposing side because the small business owner has lost her right to limited liability protection. Don't be that person.


If you are a small business owner with employees who sells things, you are required to pay payroll taxes and sales taxes on a regular basis. In addition to these regular payments, you are required to make regular reports to the IRS concerning your financials. If you do not maintain these payments, the government will suspend your entity until you've taken care of the situation. 


If you participate in some type of illegal activity through or on behalf of the business, the law is going to take away your protection. There will be little that one can do to prove that they are entitled to legal protection when it can be shown that you don't really respect the law yourself. 

Any of these 4 situations, are sure ways to lose the liability you've worked so hard to obtain. Before you jump on the limited liability protection bandwagon, be sure to have systems in place to stay protected.