From Forbes, Laura Shin provides excellent advice on setting structures that may protect your personal assets if you are a freelancer or independent contractor. She warns, however, that a separate legal entity may not protect you in all circumstances. She writes:
Don’t just think that setting up a legal entity will absolve you of all potential personal liability. There are two circumstances under which you can still be personally liable even if you’ve set up a separate business entity.
If you don’t honor a separation between your personal and your business activities, the court may “pierce the veil” of limited liability. Whether or not you’ve ignored the separation between your personal and business activities, how, and how frequently, could factor into whether or not a court would decide that a lawsuit could proceed against you personally as opposed to your company.
“If you don’t have a separate bank account for the business and just accept money and pay expenses through your personal bank account, that’s called commingling and that’s a factor that goes into piercing the veil,” says Heraty. Other activities that could factor into a decision on whether the court decides to pierce the veil include failure to observe corporate formalities, inaccuracy or lack of records of the corporation and its activities, using corporate funds for personal expenses, etc.
There isn’t a strict line as to what or how many behaviors will prompt a court to pierce the veil or not. So a judge or court would be more lenient if you’ve commingled but made business purchases on your personal card (as opposed to paying for personal expenses with business accounts). If your commingling is in the direction of your using personal funds for business expenses, just have the corporation reimburse you and keep records of it.
There’s another other, perhaps obvious, exception to your corporation or LLC protecting you from personal liability: “The limited liability of the company you’ve formed is not going to protect you from intentional wrongs you commit; for example, engaging in fraud or committing certain torts. A company is not there to be used as a shield when you engage in intentional torts,” says Heraty. “Depending on who is sued, the court would likely look at the circumstances of the case and see if the person behind the LLC is an appropriate party to the case.”
Read the full story at Freelancers, Here’s How To Protect Your Personal Assets From Liability
Of course, one excellent option is to purchase appropriate general liability and professional liability insurance. Some independent contractors neglect to buy appropriate insurance to save money. Companies that engage with independent contractors should require a certificate of insurance (COI) from each independent contractor to ensure that the independent contractor has the appropriate liability insurance.
