How can you preserve the limited liability status of the business?

Courts preserve the limited liability status of an entity when the entity behaves in a socially responsible way. Generally, this means the entity has a reasonable amount of capital and insurance to transact business and cover foreseeable risks. Moreover, when the entity has its own accounting and accounts, the responsible behavior of the entity is more easily proved.

If the entity is undercapitalized or underinsured so as to be deceptive to potential creditors and the owner does not distinguish between personal accounts and entity accounts, the courts will not honor limited liability for that entity. If an owner signs his or her name in the role of being a corporate officer, there is little risk of losing limited liability. If there is not proper accounting and separate accounts for personal and business funds, the limited liability status may be challenged.