How your business is exposed: entity, personal liability, insurance, and what a judgment can reach

The business and you are separate, mostly

If you operate through a corporation or a limited liability company, the law treats the business as its own person. It signs its own contracts, owes its own debts, and gets sued in its own name. A judgment against the business is collected from the business's assets. That separation is the main reason people form an entity at all.

If you operate as a sole proprietor or a general partnership, there is no separation. The business's debts are your debts. This course does not tell you which structure to use; that is a conversation with a lawyer and an accountant who know your facts. It does tell you that the separation, where it exists, has holes.

Where the shield has holes

• Personal guarantees. Lenders, landlords and some suppliers ask the owner to guarantee the business's obligations personally. Sign one and that debt is yours regardless of the entity.
• Your own conduct. The entity protects you from the business's liabilities. It does not protect you from liability for things you personally did. If you personally made the misleading statement, signed the contract in your own name, or directed the unlawful conduct, a plaintiff can name you as well as the company.
• Statutes that reach individuals. Some laws impose liability on the people who direct or participate in a violation, not just on the business. The rules on marketing calls, texts and email and on employees and contractors are common examples.
• Treating the business as your wallet. Mixing business and personal money, skipping the formalities, or running the entity with no assets at all can lead a court to disregard it. Lawyers call it piercing the veil. It is rare, and it is self-inflicted.

Insurance: read the exclusions

A general liability policy typically covers bodily injury, property damage and some advertising injury. It is often read by owners as "covers lawsuits". It does not. Many policies exclude claims about marketing calls and texts, employment disputes, data breaches, contract disputes and intentional acts. Those are the claims a small business most often receives.

Three things to do before anything happens. Read the exclusions page of every policy you hold. Ask your broker in writing which of the problems in this course would be covered. And when a letter arrives, notify the insurer promptly even if you doubt coverage; late notice is the easiest reason for an insurer to say no.

What a judgment can reach

A judgment is a court's order that one party owes another a sum. Against a business, it can be collected from the business's bank accounts, receivables, equipment and other assets, through procedures that vary by state (garnishment, liens, levies). Against an individual, through the same procedures against personal assets, subject to state exemptions for things like a primary residence or retirement accounts, which also vary by state.

A judgment is also a public record. It appears in court databases, in credit reports, and in the results when someone searches your name. It can stay collectable for years, and in many states can be renewed. The practical point: a problem that could have been settled privately for a known amount becomes a public finding for a larger amount if it is ignored. Lesson 9 covers how that happens.

What this means for the rest of the course

Every later lesson is about a specific way a business creates exposure: a weak contract, a misleading claim, a marketing campaign without consent, an inaccessible website, a misclassified worker. Each one is cheaper to prevent than to settle, and cheaper to settle than to lose. Keep that order in mind.