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A common mistake entrepreneurs make when forming a business

On Behalf of | Jul 11, 2023 | Business formation

Business formation is a lengthy and often stressful process. Entrepreneurs have to learn about the industry in which they hope to operate. They need to develop a business plan, and they will eventually need to secure funding for their concept. Everything from the business entity they form to the location where they operate will have an impact on an entrepreneur’s chances of success.

Even those who carefully plan may still face challenges along the way. If the business ends up failing or facing a major lawsuit, the entrepreneur who started the company may have some risk of personal losses. A common mistake during the startup phase may increase the likelihood that an entrepreneur’s personal assets will be at risk in such a scenario.

What mistake increases personal liability?

Many aspiring business owners specifically create business entities that help protect them from personal liability, like corporations or limited liability companies (LLCs). However, those who mix their business resource with personal finances may leave their own assets or even their personal income at risk.

Establishing separate financial accounts when starting a business is generally necessary to minimize the possibility of an owner being held financially accountable for the debts owed by the business. If someone uses their personal bank account or credit cards for business purchases, that could affect their rights later.

A judge could hold them personally accountable for business debts or judgments if they failed to properly separate their finances from that of the organization they started. Learning about and avoiding liability-increasing mistakes may benefit those hoping to start a new business.