Business owners concerned about protecting their personal assets from business liabilities often choose to operate their companies as a Limited Liability Company (LLC) or Corporation (usually as an S-Corporation), since these business structures provide what is known as a “liability shield”.
However, a court can dissolve this liability shield if the proper steps are not taken by the business owner to protect it. If you operate an LLC or S-Corporation, be sure you have taken these five important steps to preserve your liability protection:
- Don’t use it to commit misconduct. If you use your business entity to commit serious misconduct or fraud, a court could likely “pierce the veil” and hold you personally liable for business claims.
- Use the name of the entity on contracts and business communication. Business owners should not sign contracts or any important business communication with their personal names. Use the name of your LLC or Corporation in all business dealings so it is clear to third parties that they are dealing with an entity and not you personally.
- Keep business and personal finances separate. There should be no overlap of business and personal finances. Maintain separate bank accounts and records for your personal accounts and business accounts.
- Follow the rules. While the rules for an LLC are less stringent than those for a corporation, you will require an operating agreement and still need to track and document your business decisions. For a Corporation, you require bylaws, annual meeting minutes, and corporate resolutions. If you need support with compliance, let us know. We can help.
- Be sure the business is adequately capitalized. If a business entity lacks adequate capitalization and something goes wrong, that may cause a court to pierce the veil of the business
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