Perhaps the biggest misconception with forming a business (a corporation or limited liability company) is the belief that once the business is legally formed, then the owner has automatically shielded their personal assets from any or all liability incurred by the business. This is an inaccurate, and potentially devastating, interpretation of the law.
The question business owners typically ask is “When will I be personally liable for the debts of my business?” At this point, almost as an automatic response, attorneys give the standard-attorney-answer of “It depends.” All clichés aside, how you operate your business on a day-to-day basis will dictate whether the statutory protections will be extended to your personal assets.
Here are a few tips to help you maintain your protection of your personal assets:
1. Keep your personal money separate from the business’s money:
This seems like an easy rule to follow, but there is a reason why it is the #1 Rule on this list. The commingling of money, and other assets (vehicles, equipment, etc.), is a great way to pierce the corporate veil. First, you and your business should never share the same bank account. Second, if it is discovered through a lawsuit that your business routinely buys your groceries, pays the note on your child’s vehicle, pays for your family vacation, pays for dinners for you and your spouse, etc., then there is a strong case to be made that you and your business are one in the same. The more separation between you and your business the more likely you are to maintain protection for your personal assets.
2. Maintain your corporate formalities:
a. Regularly review and/or update your By-Laws.
b. Issues stock certificates to shareholders.
c. Conduct an annual shareholder meeting; even if you are the lone shareholder of your corporation.
d. Record the minutes of all shareholder meetings.
e. Establish a Board of Directors.
f. Make sure you submit the proper annual filings, with the necessary filing fees, to the proper state agencies.
g. Lastly, if not already done so at the shareholder meetings, make sure you properly document any and all major business decisions or contracts entered into.
Limited Liability Company.
a. Regularly review and/or update your Operating Agreement.
b. Issue membership certificates to members.
c. Although not required by statute for limited liability companies, it is recommended that you also hold member meetings (annual, semi-annual, or quarterly) and keep the minutes of all member meetings.
d. Make sure you submit the proper annual filings, with the necessary filing fees, to the proper state agencies.
e. Lastly, if not already done so at the member meetings, make sure you properly document any and all major business decisions or contracts entered into.
3. Display your corporate status:
a. Whether you are a shareholder of a corporation or a member of a limited liability company, whenever you enter into a legal document (service contracts, leases, etc.) you should sign as an agent of your business (assuming you are an authorized agent) rather than signing in your personal name. Otherwise there may be the presumption you agreed to be personally liable for the performance of the agreement you entered into.
b. On your letterhead, business cards, invoices, etc., make sure you display the corporate status of your business (e.g. Inc., Corp., LLC).
c. Pay all business expenses with a business bank account, credit card, etc.
This article provided an overview of the policies and procedures that you should implement with your business to ensure you protect your personal assets from liability. Contact an experienced, local attorney to review your specific business’s policies and procedures.