One of the best parts of forming a Corporation or Limited Liability Company is that it provides the owners personal liability protection. Actually, this is one of the main reasons for forming a Corporation or LLC.
When running a sole proprietorship, the responsibility of the company is squared onto the person running the business. Therefore, if a customer gets hurt from any negligence related to the operation of your business, your personal and business assets are liable to a lawsuit. However, if you file a Corporation or LLC, your personal assets will be protected. In running your business, the individual working for the Corporation or LLC is not obligated to pay any debts or claims against the company. Only the business assets and what assets the individual brings to the Corporation or LLC is vulnerable to a lawsuit. Therefore a creditor can't legally sue for your personal assets such as your home or your car.
There are exceptions to this liability proection however. Actions done by an individual while directly working for the Corporation or LLC can make this individual vulnerable to a lawsuit. These exceptions include events such as the person directly injuring another person, if the person co-signs or guarantees a loan, co-mingling assets between the business and person, or fraud.
To keep your business affairs separate from yourself it is vital that you maintain separate bank accounts. Do not pay for business expenses using personal accounts. It is a good idea to maintain good bylaws and a operating agreement depending on the business type.
Although, the liability protection protects you as a person from any debts and obligation, you must also protect your business as well. There are many types of liability protection that you can obtain for the business. Like most insurance, fees can vary drastically depending on the coverage and provider.
You can read more at our Limited Liability for LLC and Limited Liability for Corporations pages.