Liability refers to a person’s legal responsibility to correct some wrong caused by their fault. If you cause a car wreck, you’re probably liable and you (or, hopefully, your insurance) will have to pay. If an accident happens at your business, you want to make sure that your home, car, and other personal assets can’t be seized to satisfy any liability. There a few different ways to avoid personal liability

One of the main reasons business owners cite in favor of creating a business entity is protecting themselves from liability, and they’re right. Most entities create separate realms of liability, so your business and personal life become separated. If an accident happens at your business, you can prevent someone from taking your house to pay their medical bills. If you’re printing signs, letterheads, and business cards, it’s important to put the business name on them so that third-parties are aware that they are dealing with your business, and not with you personally.

When you do create a business entity, you need to make sure you observe the corporate formalities of your business. For example, Louisiana LLCs must file an annual report. Corporations must have annual shareholders and directors meetings. Basically, you need to play by the rules in order to claim protection from personal liability. Also, whenever you sign a document on behalf of the business entity, make sure you indicate that below the signature line.

The next step is to avoid personal guarantees. Many small business owners face the issue of making a personal guarantee for a loan, lease, or other business opportunity. If they don’t make that personal guarantee, they may lose that business opportunity. You should avoid a personal guarantee if at all possible. Even if you have a business entity, making a personal guarantee can result in personal liability.

Always pay your taxes. This seems to be a recurring theme around here. Certain taxes can give rise to personal liability if they go unpaid.

Finally, carry insurance. I know, it gets expensive, as I pay professional liability insurance myself. When in doubt, ask your agent about an umbrella policy, which is insurance to cover things that aren’t already covered by insurance (maybe I should have been an insurance agent).

Following these 5 rules can’t guarantee that you’ll be free from personal liability, but if you’re going to spend the time, money, and expense to develop a business and form an entity, it’s better to be safe than sorry.