Making Business Happen

The importance of separate finances for entrepreneurs

On Behalf of | Jul 24, 2024 | Business Formation

Starting a business is a relatively complex process. First-time entrepreneurs often feel rather overwhelmed. Even those who have started a company before could potentially make mistakes that lead to organizational setbacks or personal liability.

An aspiring entrepreneur who feels excited about a business concept may rush ahead in their attempt to establish their business before someone else beats them to it. Their eagerness to begin operating could leave them exposed if the company fails or faces lawsuits in the future. As such, the sooner an entrepreneur establishes separate financial accounts for a business they intend to start, the better their protection will likely be against personal financial liability in the future.

Even LLCs don’t offer complete protection

The structure of a new business helps provide a degree of separation between the entrepreneur starting the company and the business itself. Forming a limited liability company (LLC) is one way for an entrepreneur to mitigate their personal liability should the company fail or face expensive lawsuits in the future.

An LLC and other formal business structures can help an entrepreneur protect their personal assets and future income from claims made by customers, employees or business creditors. However, that protection is subject to certain limits.

In cases where the business fails and has outstanding debts or lawsuits in the works, creditors and plaintiffs may try to hold the entrepreneur personally accountable. They may do that by going to court and asking a judge to pierce the corporate veil. This legal maneuver effectively involves holding the individual who started the business accountable for the business’s financial obligations.

Piercing the corporate veil is typically only possible in scenarios involving some kind of financial misconduct. The commingling of personal assets with business resources is one example of financial errors when starting a business that could leave an entrepreneur exposed. The sooner there is a separate and dedicated account used for the business, the harder it may be for outside parties to try to hold an entrepreneur personally accountable for business liabilities.

Small mistakes during the business startup process can undermine the protection that an entrepreneur enjoys after creating a formal business entity. Those hoping to start a new business may need to explore potential sources of liability early in the process for their own protection. Following the right procedures during the business startup process can significantly reduce the degree of risk involved.