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Will Your Business Protect You from Liability?

Nov. 20, 2024

Welcome back to our business formation series. In our previous article, we discussed how your business will be treated for tax purposes in New Jersey. Today, we turn our attention to a critical question every entrepreneur should ask: Will your business protect you from liability? 

Understanding business liability protection is essential for safeguarding your personal assets. As a Stature Legal, our experienced business lawyers help New Jersey business owners understand the complexities of liability to ensure they're adequately protected.

The Importance of Liability Protection in Business

Liability protection is a fundamental aspect of running a business. Without it, your personal assets—like your home, car, and savings—could be at risk if your business faces legal issues or debts. Business liability protection creates a legal separation between you and your company, ensuring that creditors cannot pursue your personal assets to settle business obligations. Consulting a New Jersey business lawyer can provide you with the insights needed to mitigate risks and protect your financial well-being.

Business Structures That Offer Liability Protection

In the first article of our series, we discussed the different types of business entities New Jersey business owners can form. Selecting the right structure is crucial for effective liability protection. Here are the entities that provide a shield for your personal assets:

  • Limited Liability Companies (LLCs): An LLC combines the flexibility of a partnership with the liability protection of a corporation. Members of an LLC are typically not personally responsible for business debts or legal judgments against the company.

  • Corporations (C-Corp and S-Corp): Both C-Corps and S-Corps are separate legal entities from their owners (shareholders). This separation means that shareholders are generally not personally liable for the company's debts and obligations.

By choosing one of these structures, you can limit your financial exposure and ensure that your personal assets remain protected in the event of business challenges.

Business Structures That Do Not Offer Liability Protection

Some business structures do not provide a barrier between your personal and business assets, leaving you vulnerable:

  • Sole Proprietorships: This is the simplest form of business ownership, where there's no legal distinction between the owner and the business. You are personally liable for all debts and legal actions against the business.

  • General Partnerships: In a general partnership, all partners share equal responsibility for the business's liabilities. Each partner's personal assets can be used to satisfy business debts, regardless of who incurred them.

Operating under these structures means your personal assets could be at risk if the business faces financial trouble or legal issues.

Factors That Can Compromise Liability Protection

Now that you understand the business entities that offer liability protection, you must also know that certain actions can jeopardize your personal asset protection:

  • Personal Guarantees: If you personally guarantee a business contract, such as a loan or a lease, you're directly responsible for payment if the business defaults, effectively bypassing your liability protection.

  • Commingling Personal and Business Funds: Mixing personal and business finances can lead to "piercing the corporate veil," where courts disregard the separation between you and your business, making you personally liable.

  • Engaging in Fraudulent or Illegal Activities: Liability protection does not cover illegal actions. If you're found guilty of fraud or other illegal activities, you can be held personally responsible.

  • Responsibility for Employee Payroll: If the business fails to pay employees their legally entitled wages, you could be held personally liable under certain state and federal wage laws. Liability protection may not shield you if your role in payroll decisions results in unpaid wages, putting your personal assets at risk.

It's crucial to maintain proper business practices and consult with a lawyer to avoid these pitfalls.

How Stature Legal Can Help

Working with our New Jersey business lawyers ensures that you're fully leveraging the liability protection your business structure offers. Our attorneys can help you:

  • Choose the right business entity for your needs.

  • Draft operating agreements or stockholder agreements that reinforce liability protection.

  • Establish best practices for separating personal and business activities.

  • Navigate New Jersey regulations that affect liability.

Conclusion 

Protecting yourself from personal liability is a vital step in securing both your personal and business futures. Choosing the appropriate business structure and adhering to legal best practices are essential in maintaining this protection. Join us next time as we discuss the various types of business insurance policies.

Are you wondering about any of the issues mentioned above? Please email us at  info@staturelegal.law or call (732) 320-9831 for assistance.

At Stature Legal, our New Jersey business lawyers give business owners the clarity they need to fund, grow, protect, and sell their businesses. We are trustworthy business advisors keeping your business on TRACK: Trustworthy. Reliable. Available. Caring. Knowledgeable.®

Explore Our Business Formation Series

Dive deeper into the essentials of establishing and managing your business in New Jersey with our comprehensive series:

Each article is crafted to provide you with the knowledge and tools necessary for successful business formation and operation in New Jersey