There are many significant legal and practical issues to address when starting a business. People need to research their market niche, submit formation paperwork to the state, negotiate contracts with suppliers and protect their unique intellectual property from infringement.
Throughout that process, they also need to maintain clear financial separation between the business and the person or people forming the company. Setting up separate financial accounts and opening business lines of credit are key steps for the protection of entrepreneurs.
Financial mistakes during business formation can cause issues later
Paying for business startup expenses out of a personal account or similar financial commingling can have devastating consequences. Typically, people forming limited liability companies (LLCs), corporations and other more complex businesses have protection from liability for the financial obligations of the organization.
Creditors and plaintiffs filing lawsuits must take action against the company, not the person who started the organization or who currently runs it. However, when there is proof of financial misconduct, such as commingling personal assets with business resources, creditors and plaintiffs in lawsuits can ask the courts to pierce the corporate veil.
The courts can set aside the liability protection typically extended to business owners, which allows creditors and plaintiffs to take direct action against individuals instead of the company. Piercing the corporate veil is a common strategy in cases where companies are insolvent or when owners may have more resources than the businesses they operate.
Learning about the risks of business formation can help people to better ensure that they adequately protect themselves. An attorney familiar with business formation procedures and liability rules can help people ensure they protect themselves when starting new businesses accordingly.