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These days, many businesses are struggling to stay afloat. The recession has hit small and mid-sized business especially hard. Some business owners are surprised to learn that they’re personally liable for business debts. Their personal assets – home, car, and savings – are at risk.

Other owners have planned ahead. If their businesses falter, their personal liability is limited. So how can you protect your own assets?

CONSIDER FORMING A CORPORATION OR LLC

For starters, look at the structure of your business. Is it a sole proprietorship? If it is, you’re personally responsible for all business debts. This is so whether the debt is based on a contract, or is the result of someone being injured on your business property or by a business vehicle.

The same is true if your business is a partnership. And here, each partner is personally liable for the business debts incurred by the other partners.

This is a good time to consider changing your business to a corporation or limited liability company (LLC). Either of these business formats will greatly limit your personal liability. Nowadays, most small businesses prefer operating as an LLC rather than as a corporation. An LLC is easier to create, involves less paperwork, and gives you more flexibility. Your lawyer can help you decide whether a corporation or an LLC is best for you.

A CORPORATION OR LLC WON’T PROTECT YOU COMPLETELY

Even with a corporation or an LLC, you’re not completely free of personal liability. For example, you’ll be liable if you personally cause an injury to someone or damage the person’s property. The same is true if you personally guarantee a bank loan given to the business.

You can, of course, buy insurance to cover injury or property damage claims. And you can do your best to avoid giving personal guarantees – though that’s tough to do if your business needs a bank loan. Banks fear that small businesses may run out of money.

Having a corporation or LLC won’t protect you if you’re careless in observing the distinction between yourself and your business. You can open the door to liability if you don’t use the correct business name. And you’re looking for trouble if you sign contracts for the business without stating that you’re acting as an officer or agent of the business.

You also stand to lose if you pledge your home or car as security for a business debt. If your business doesn’t pay the debt, the creditor may seize the property you’ve pledged.

SOME DEBTS HAVE HIGH PRIORITY

If your business is running low on cash, you’ll need to decide which bills to pay first. Give your highest priority to payroll taxes. These are the sums you withhold from employee paychecks to cover income taxes, and Social Security and Medicare taxes. Owners and officers of a business are personally liable for paying these taxes – called “trust fund” taxes.

Slip up, and you’ll owe a penalty equal to the unpaid trust taxes, plus interest. If you don’t pay the trust fund taxes, the IRS can seize not only your business’s equipment, but also your personal assets. In some cases, the IRS can even charge you with a -*crime for failing to deposit the payroll taxes.