Starting a limited liability company (LLC) can be a great way to pursue your dream of setting up a business. This option offers benefits, but the most notable one is shielding your personal assets from your company’s liabilities. But here is the cold, hard truth: your liability shield is only as strong as your financial discipline.
As a business owner, the last thing you want to happen is for creditors to seize your belongings. To prevent this from happening, understanding the dangers of commingling funds is crucial.
Defining commingling in New York
The biggest threat to your legal protection is commingling funds. This means mixing your business money and personal money. Examples include:
- Paying your apartment rent using payroll
- Buying inventory on your personal credit card
- Purchasing personal items out of the business checking account
- Using a business credit card for a family vacation
Committing any of these puts your LLC status at risk, as commingling pierces your liability protection.
Piercing the veil of protection
When you commingle funds, it gives a creditor or another party the right to ask a judge to pierce or disregard your corporate veil of protection. In this process, the courts look for proof that you treated the business as a legal extension of yourself, not a separate entity.
If proven, you become personally liable for your business’s debts, regardless of your LLC status. This gives the creditor the right to seize your personal assets to settle your company’s outstanding debts.
Practicing diligence to avoid complications
Although New York laws provide protections to LLC owners, you must be financially responsible. Being reckless can lead to abusing this privilege. Remember that your financial records are proof of your diligent approach. If you have not done it yet, ensure to establish rules of absolute financial separation according to federal and state standards.
Starting a business can be overwhelming because you have multiple factors to consider. You need legal help to avoid common pitfalls that can put your company in jeopardy.