The Moneymagpie Team
25 June 2026
Study Time: 2 minutes
If you run a business as a sole proprietor, all debts incurred by the business are your personal responsibility. Many people start out that way, but the risk increases as incomes increase and contracts become more complex. Forming an LLC or corporation creates a legal barrier between the business and your personal wealth.
Understanding responsibility
When you form an LLC, the law treats it as a separate legal entity. Your company can enter into contracts, take on debt, and face lawsuits on its own behalf, without you as an individual. If a business fails to pay, creditors can only go after the company’s assets. Your personal debt is usually counted against any money you put into the business.
The Revised Uniform Limited Liability Company Act, which most states have adopted, makes it clear: a member is not personally liable for any debt or liability of the company simply by virtue of being a member. Therefore, if a customer sues a business for a defective product, they are suing the LLC, not you.
However, the courts can “pierce the corporate veil” if you abuse this structure. Mixing personal and business finances, failing to hold proper meetings, bankrupting the company, or using it as a front to avoid debts you already owe can cause this.
Maintaining security through financial and business practices
One very important practice is to keep your money and the company’s money separate. Open a dedicated business bank account and never pay personal debts on it. If you frequently blur that line, a court could argue that the LLC isn’t really separate from you, and your personal assets become fair game.
Signing contracts in the LLC’s name rather than your own reinforces the legal separation. A Florida LLC provides strong creditor protection in multi-member structures, but even that benefit evaporates if the owner treats the business bank account like a personal wallet.
Banks and landlords often ask LLC owners to personally guarantee loans and leases, but it’s important to avoid doing this if possible. If your LLC fails, the creditor can come after your home and savings to cover the balance.
Using tax planning techniques
An LLC also allows you to plan how you get paid. By default, the IRS taxes all of your LLC profits as self-employment income, which means you pay both employer and employee Social Security and Medicare taxes in addition to income tax. But if you choose S-corp tax status in complete form 2553you can pay yourself a decent salary and take the rest as dividends.
The qualified business income (QBI) deduction, which was supposed to expire, was made permanent and expanded under the One Big Beautiful Bill Act. It allows business owners to take a percentage of qualified earnings before calculating their tax.
To adjust for recent regulatory changes
The Corporate Transparency Act originally required millions of US businesses to report their identity information to FinCEN. In March 2025, FinCEN took that backand all domestically formed companies are now exempt, and only foreign formed companies registered to do business in the US need to file.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore the information contained herein including opinions, comments, suggestions or strategies is for informational, entertainment or educational purposes only. This should not be taken as financial advice. Anyone considering investing should conduct due diligence.
