How to Protect Yourself from Liability when Signing a Contract
Identify corporate forms that protect you., Create a corporation or LLC., Enter business contracts properly., Keep your business in compliance., Avoid singing a personal guaranty., Review contracts with your business lawyer.
Step-by-Step Guide
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Step 1: Identify corporate forms that protect you.
Some business forms are legally distinct from their owners.
Others aren’t.
If your business is legally separate, then you can’t be personally responsible for business contracts.
Consider the following:
Corporations.
Corporations are owned by shareholders who are shielded from personal responsibility for business debts.
However, your corporation can’t be a “sham.” For example, you can’t create a corporation and use it for personal contracts.
Instead, your business must sign only for business contracts.
Limited liability companies (LLCs).
An LLC is owned by its members.
Like a corporation, an LLC shields the owners from legal liability.
Sole proprietorships.
Unfortunately, sole proprietorships are legally indistinct from their owners.
This means you are personally responsible for all business debts.
Partnerships.
Generally, partnerships are indistinct from its partners.
However, some states have created “limited liability partnerships” which provide protection like an LLC. -
Step 2: Create a corporation or LLC.
You can create either by filling out paperwork and filing it with your state’s Secretary of State or other office.
You will need to pay a filing fee when you file.
To form a corporation, you’ll need to file Articles of Incorporation and take other steps.
To create an LLC, you’ll need to file Articles of Organization and complete other tasks. , Avoid being careless.
Instead, make sure that the loan properly identifies the business as the principal party to the contract.
Don’t sign if the contract identifies you as the principal party.
If you sign, identify that you are signing as a representative for the business.
Also include your title, such as “president” or “managing director.” Also avoid entering a contract until your corporation or LLC has been legally created.
If you accidentally signed a contract early, ask the other party for a “novation,” which will transfer liability to the company.You should also include an appropriate “no personal liability” provision at the end of all business contracts. , Corporations and LLCs must file paperwork with their state.
For example, you may need to file an annual statement or maintain books at your principal place of business.You also may have to pay an annual fee to your state.
Make sure you observe all formalities.
If you don’t, a court might hold you personally responsible for business liabilities if you are sued.
Consult with a business attorney to understand precisely what you must do to keep your business in compliance. , Getting business loans can be difficult, especially when you are a new business.
Some lenders might only extend a loan if you personally guarantee the loan.
By signing a personal guaranty, you essentially destroy the limited liability protection the corporate or LLC form gave you.Consider other options instead.
Go to a different bank or credit union and check if you can get a loan.
They might be willing to loan for a higher interest rate.
You might also consider online lenders, who might be more willing to loan to your business. , Keep a lawyer on retainer and have them review your business contracts so that you protect your business from unnecessary liability.
You might resist an attorney’s expense, but they can help you avoid signing away rights when you contract for goods or services. -
Step 3: Enter business contracts properly.
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Step 4: Keep your business in compliance.
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Step 5: Avoid singing a personal guaranty.
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Step 6: Review contracts with your business lawyer.
Detailed Guide
Some business forms are legally distinct from their owners.
Others aren’t.
If your business is legally separate, then you can’t be personally responsible for business contracts.
Consider the following:
Corporations.
Corporations are owned by shareholders who are shielded from personal responsibility for business debts.
However, your corporation can’t be a “sham.” For example, you can’t create a corporation and use it for personal contracts.
Instead, your business must sign only for business contracts.
Limited liability companies (LLCs).
An LLC is owned by its members.
Like a corporation, an LLC shields the owners from legal liability.
Sole proprietorships.
Unfortunately, sole proprietorships are legally indistinct from their owners.
This means you are personally responsible for all business debts.
Partnerships.
Generally, partnerships are indistinct from its partners.
However, some states have created “limited liability partnerships” which provide protection like an LLC.
You can create either by filling out paperwork and filing it with your state’s Secretary of State or other office.
You will need to pay a filing fee when you file.
To form a corporation, you’ll need to file Articles of Incorporation and take other steps.
To create an LLC, you’ll need to file Articles of Organization and complete other tasks. , Avoid being careless.
Instead, make sure that the loan properly identifies the business as the principal party to the contract.
Don’t sign if the contract identifies you as the principal party.
If you sign, identify that you are signing as a representative for the business.
Also include your title, such as “president” or “managing director.” Also avoid entering a contract until your corporation or LLC has been legally created.
If you accidentally signed a contract early, ask the other party for a “novation,” which will transfer liability to the company.You should also include an appropriate “no personal liability” provision at the end of all business contracts. , Corporations and LLCs must file paperwork with their state.
For example, you may need to file an annual statement or maintain books at your principal place of business.You also may have to pay an annual fee to your state.
Make sure you observe all formalities.
If you don’t, a court might hold you personally responsible for business liabilities if you are sued.
Consult with a business attorney to understand precisely what you must do to keep your business in compliance. , Getting business loans can be difficult, especially when you are a new business.
Some lenders might only extend a loan if you personally guarantee the loan.
By signing a personal guaranty, you essentially destroy the limited liability protection the corporate or LLC form gave you.Consider other options instead.
Go to a different bank or credit union and check if you can get a loan.
They might be willing to loan for a higher interest rate.
You might also consider online lenders, who might be more willing to loan to your business. , Keep a lawyer on retainer and have them review your business contracts so that you protect your business from unnecessary liability.
You might resist an attorney’s expense, but they can help you avoid signing away rights when you contract for goods or services.
About the Author
Zachary Harris
Professional writer focused on creating easy-to-follow DIY projects tutorials.
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