What Is Limited Liability?
One of the main reasons to form an LLC or corporation is to have "limited liability," that is, to limit your personal liability for business debts. Creditors of your business must go after the business, not you personally. If you form one of these entities, business creditors cannot take your home or car or attach your wages. But forming an LLC or corporation will not always shield all of your personal assets. Even if you operate your eBay business as a corporation or LLC, a creditor can still go after your personal assets in the following circumstances.
You personally guarantee a loan or lease. If your eBay business borrows money or if you lease space, chances are that the lender or landlord will condition the loan or lease upon the business owner’s personal guarantee. Both the business and you as the owner would have to file bankruptcy in order to escape these debts.
You owe federal or state taxes. If your eBay business fails to pay income, payroll, or other taxes, the IRS or state tax agency can try to recover the unpaid taxes personally from you or any other directors, officers, or owners of your LLC or corporation.
You act negligently. If your eBay business does something that could subject you to potential negligence claims, for example, you manufacture and sell defective products, you can be personally liable for the damage. In these cases, buying insurance may offer more protection than forming a corporation or LLC.
You fail to abide by corporate rules. If you don’t take corporate responsibilities seriously, for example, you mix corporate and personal funds and don’t keep records of meetings and shareholders, a judge may strip away the asset protection feature of the corporation or LLC.
Keep in mind that in seven states (Hawaii, Illinois, Montana, South Carolina, South Dakota, Vermont, and West Virginia), it may be possible for a personal creditor of an LLC owner to ask a court to dissolve the LLC. You can learn more about debts, personal liability, and bankruptcy by reading this article.