If you own a small business, or you are thinking about starting your own business, you have probably worried about protecting your personal assets from liability. You also probably know that forming a corporation (S-Corp or C-Corp) or a limited liability company (LLC) is an important step toward protecting your personal assets.
The problem is that many people stop there; they think they are bullet proof by simply filing the Articles of Organization/Incorporation with the Secretary of State. The reality is that you should do much more in order to be fully protected and maintain your protection over time.
If you take proper steps, you can create a strong veil around your personal assets. If you do not take proper steps, people can still go after your personal assets. Here are five ways to help maintain your veil to avoid personal liability.
1. Create a code of regulations and follow them (aka Bylaws or Operating Agreement). At a minimum, you should create Bylaws (for corporations) or an Operating Agreement (for LLCs). A variety of issues can arise without a code of regulations, but perhaps the most important risk is that your business lacks the appearance of being an actual business. In addition, once you have a code of regulations, you also need to follow them. Ignoring your own regulations is easy ammunition for creditors to pierce the veil.
2. Keep business money separate from personal money. Once your business is formed, obtain an EIN from the IRS and open a checking account in the name of your business. You can expose yourself to liability if you deposit business checks or pay business expenses from your personal bank account. The goal is to establish some separation and distinction between the business and the business owners.
3. Hold formal management meetings and keep minutes. A typical business will have a Board of Directors and Officers, and each group will hold regular meetings to approve business decisions. Your code of regulations can be drafted in a way to reduce or virtually eliminate the need for meetings, and small LLCs are not required to hold regular meetings; however, it is still recommended that you follow this simple formality (think: belt and suspenders).
4. Use business resolutions to document major business decisions. A typical business will vote before making business decisions. If a decision is approved, a resolution will be drafted and signed confirming that the Board or an Officer is authorized to take certain actions on behalf of the business. Small companies, even single-owner companies, should still follow this model.
5. Use the company’s full legal name when corresponding with the public. Once you form a corporation or an LLC, you should make it clear to the public that they are doing business with your company; not with you as an individual. Your invoices, estimates, checks, website, customer agreements, etc. should all have your company's name. There is often no reason for your personal name to be included.
Naturally, I have to include the disclaimer that this quick summary should not be used as a substitute for legal advice for your particular circumstances. These five steps cannot guarantee protection from liability, but they are simple steps that you can take to help avoid personal liability.