Starting a business is exciting but it is also a legal commitment. One of the most overlooked decisions entrepreneurs make is choosing the right business entity when starting their company. That choice can determine whether personal assets — including one’s home, savings and investments — are safe if their business faces any legal troubles. Beyond the formation of a company, maintaining separation between personal and business finances and layering in insurance and legal reviews are critical steps to long-term protection.
Many entrepreneurs stumble into legal trouble because they underestimate the importance of formal processes. Skipping written agreements and relying on verbal promises often leads to disputes that are hard to resolve. Others fail to register their business correctly or ignore licensing requirements, exposing themselves to fines and penalties. Inconsistent record keeping, such as missing receipts or incomplete payroll documentation, can trigger tax issues and regulatory audits. Another frequent oversight is neglecting to update policies as the business evolves, leaving outdated terms that don’t reflect current operations. These gaps create vulnerabilities that can escalate into costly legal challenges.
Here’s how to build a strong legal foundation that grows as one’s business does.
Why Legal Structures Matter
A business entity isn’t just a formality but is a business’s first line of defense. Sole proprietorships may be simple, but they offer zero liability protection. If a business is sued, the owners’ personal assets can be on the line. Forming an LLC or corporation creates a legal barrier between personal and business obligations.
An LLC is often the go-to for small businesses because it combines flexibility with liability protection. Corporations, while more complex, can offer additional benefits like easier access to capital and structured governance. The key is understanding risk profile and growth plans based on the size and growth of the business.
Avoid Piercing the Corporate Veil
Just forming an LLC or corporation isn’t enough to maintain the separation of personal and business finances. Courts can “pierce the corporate veil” if a business owner mixes their finances, leaving the owner personally liable for business expenses.
To avoid this, business owners should:
- Open separate bank accounts for business transactions
- Keep records clean by tracking expenses, invoices and payroll accurately
- Sign contracts in the business name, not the owner or employees
- Follow formalities like annual filings and meeting minutes if required
It’s important to think of entity as a shield. Every time a business blurs the lines, that shield is weakened. Treating a business like a distinct legal entity ensures that the business owner can preserve the protection they initially created.
Combining Legal Protection with Insurance
Even with the right entity and clean records, lawsuits and accidents can happen, which is where insurance comes in. General liability coverage protects against claims like property damage or injury. Professional liability covers errors in services.
It is also important to pair insurance with periodic legal reviews, because as laws change so can a business. Scheduling an annual check-in with a business attorney to update contracts, compliance practices and entity status can help keep one’s business safe. A layered approach, including legal structure, financial separation, insurance and reviews, creates a comprehensive protection plan that grows as one business does.
Building a business is about more than just revenue; it’s about resilience. By choosing the right entity, maintaining separation and reinforcing the shield with insurance and legal oversight, business owners can protect what matters most: their future.
Blake Moscatello has been helping businesses around the Valley as a lawyer for more than eight years, ensuring that they understand the importance of business planning, estate planning, asset protection and more. Since leaving the large firm where he practiced for six years to found his own firm, The Moscatello Group, in April of 2024, Moscatello has assisted families and businesses in business law practices to help them strengthen and grow.
