A limited liability company (LLC) is a viable option for many aspiring business owners. LLCs offer income tax benefits and allow one person or a group to start a company. They are also a way to help protect entrepreneurs from personal financial risks.
Forming an LLC helps protect the new business owner from direct liability should the business fail or face litigation brought by an employee or customer. However, the protection granted is not absolute. Business owners still have to take certain steps to protect themselves and their finances.
During the excitement of the startup stage, many people starting LLCs make a basic mistake that may limit how much benefit they derive from their business structure. Prioritizing the separation of personal and business finances is crucial for the protection of the owner.
Commingling can lead to liability later
When first starting a business, it is very easy to fall into the habit of using personal financial accounts to cover basic expenses. However, doing so can later lead to claims of commingling and complications if the business faces legal or financial controversy. Creditors and plaintiffs bringing lawsuits can sometimes hold LLC owners accountable for business obligations if there is proof of financial misconduct, such as commingling.
By establishing separate finances early on in the business formation process, an entrepreneur starting an LLC can shield their personal resources and future income from claims against the business. The sooner the new business owner starts a separate bank account, the less risk their personal resources face in the future.
Learning more about how to optimize the protections available during the business formation process can help people avoid mistakes that may ultimately result in personal financial liability. LLCs can be a powerful tool provided that the party starting the LLC follows the right process.