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| The Importance of Entity Protection |
Business entities, such as a Limited Liability Company, Limited Partnership, or Corporation, can provide you with protection from personal liability for certain contracts entered into, and conduct performed on behalf of, your incorporated business. This additional protection from personal liability is one of the most important reasons for forming a business entity. In order to impose personal liability on the person working for the business entity, the "corporate veil" must be pierced, making it harder to impose personal liability on the individual for the business acts. However, the entity does not protect one from one's own negligence or intentional misconduct; therefore, the protection is only limited with respect to torts. In addition, if any loans are signed with personal guarantees, as is often required by lenders, personal assets may still be at risk for the debts of the business.
In order to obtain entity protection, the small business owner must ensure that they are signing documents in the name of the company, keeping separate accounts and records, and placing people on notice that they are dealing with a business entity. For example, any signs, letterhead, business cards, and other advertisements of a Limited Liability Company, should have the company's name along with the letters "LLC" at the end. In addition, all contracts should be signed by you as a member or manager of the LLC, depending on how your formation documents set forth management of the company. If a person doing business with your entity is not put on notice that they are conducting business with an LLC or other company with limited liability for its owners, the courts may ignore the entity form and impose personal liability on the owners.
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