Understanding Liability With California Corporations and LLCs

Information about Liability with California Corporations and LLCs

Finding a business model that limits personal liability is essential for most entrepreneurs. It leads them to establish California corporations or LLCs. Liability indicates owed money, or debt, and can include everything from wages paid, to employees, or to rent for your operating space.

The issue of personal liability is complex, and choosing a California LLC or corporate structure does not guarantee protection. Understand the details of your choice so that with the help of your California incorporation lawyer, you can operate your business with maximum success and security.

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Establishing your business with a limited liability structure can protect your assets from the following risks:

  • Regarding misinterpretation of contracts
  • Lawsuits regarding debt
  • Lawsuits regarding customer, employee, or third party injury that occurs on your business premises
  • Personal responsibility for debt and credit lines incurred during normal business functioning
  • Fines enacted by the state or federal government due to your business’ failure to meet regulations
  • Liabilities incurred by your employees during work, including accidental and intentional damages caused to customers or other parties

It is important to understand how owners will be affected if a California corporation or a California LLC encounters problems. While every situation is unique, in general, shareholders, owners, or members will only lose their interests, or what they invested and currently own in the business. Separate personal assets, such as cars and houses, are usually protected by the limited liability structure of a California corporation or LLC.

Exceptions to California Corporation and LLC Personal Liability Protection

For the most part, establishing a California LLC or corporation protects your personal assets, but exceptions do exist. Familiarize yourself with these situations and ask your California incorporation lawyer for help in guarding yourself against them.

In one potential situation, banks may require a personal guarantee on loans made to small or new California LLCs or corporations. A personal guarantee means the owner of the business has agreed to repay the loan using personal assets if the business defaults. Before making a personal agreement on a loan, make sure that the benefit which the company will receive from obtaining the loan outweighs the risk to your personal assets.

Illegal behavior can also jeopardize your personal assets. For example, you could be personally liable regardless of your business structure’s liability shield if you own a California corporation or LLC which is found guilty of fraud, or if some element of your operating space, products, or services cause harm or injury due to negligence.

Similarly, if your business does not pay taxes, either on the federal or state level, the IRS can attempt to recover the funds from the personal assets of the owners/members/shareholders of the corporation or LLC.

Finally, be honest with investors and other third parties who may do business with your California corporation or LLC. Honesty regarding your company’s financial standing is especially important, as is funding your business appropriately. Underfunding your business and being dishonest regarding its stability can cause you to lose personal liability protection in the eyes of the court. For example, if you tell investors that your business is more financially solvent than it actually is, and these investors lose money, you may be held personally liable.

A court may decide to “pierce the veil,” meaning they can ignore the limited liability status of your California corporation or LLC. Piercing the veil allows a court to go after your personal assets if you commit mentioned errors. A California corporation may even be subject to the loss of limited liability protection by failing to follow required formalities, such as holding and documenting annual meetings.

One good way to avoid losing limited liability protection is to keep business dealings distinct from personal finances. For example, keep separate books for personal and business expenses, use different bank accounts, and get an EIN for your California LLC or corporation right away. If you operate your business legally and ethically, obtaining the appropriate permissions and permits for all of your actions, you should be able to avoid putting your personal assets at risk.

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