Running a business comes with financial risks, especially when the business takes on debt. If the business cannot pay its debts, creditors may try to recover money from the owner if the owner is personally liable for those debts. Taking steps to protect personal assets can help reduce this risk.
What to consider when protecting personal assets
While no strategy offers complete protection, certain practices can significantly lower an owner’s exposure to business debt. Business owners can take several steps to reduce the risk of personal liability for business debt, including:
- Choosing a business structure carefully: Kentucky allows businesses to use several structures. Both LLC and corporation generally provide owners with protection from personal liability for business debts. However, this protection has limits. It does not cover every personal obligation.
- Reviewing personal guarantees carefully: Lenders, landlords or suppliers may ask you to personally guarantee a business debt. This can make you responsible for the debt if the business cannot pay. Know your obligations before signing.
- Maintaining proper business records: Accurate financial records, contracts and other business documents can show that the business operates separately. They can also show that owners keep business and personal affairs separate. Business owners should follow the rules for their chosen business structure.
Even with an LLC or corporation, an owner may face personal liability in limited circumstances. Kentucky courts generally consider whether the owner exercised such control over the business that the entity no longer had a truly separate existence. They also consider whether maintaining the liability protection would result in fraud or promote an injustice. Factors such as commingling personal and business funds or inadequate capitalization may support this analysis, but failing to follow business formalities alone does not automatically remove an LLC member’s liability protection.
Protect personal assets through careful planning
Kentucky business owners should plan ahead for paying or managing business debt. Addressing debt early may help them avoid greater financial problems and take steps to protect their personal assets. When a business struggles with debt, an attorney can help the owner understand their options. This can help the owner make informed decisions before taking action that could affect personal property.
