Smart business owners have their companies organized as a corporation or a limited liability company to protect their personal assets from business liabilities, since these business structures provide what is known as a “liability shield”.
However, this liability shield can be pierced if the business owner doesn’t take the proper steps to protect it. If you have an LLC or a corporation, be sure you are doing these five important things to preserve your liability protection:
1. Only use your business for legitimate purposes. If you use your business entity to commit serious misconduct or fraud, it is very likely the court would “pierce the veil” and hold you personally liable for business claims.
2. Use the legal name of the entity on contracts and business communications. Business owners should not sign contracts or any important business communications 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 the business entity and not you personally.
3. Keep business and personal finances separate. There should be no comingling of business and personal finances. Not maintaining separate bank accounts and records for your personal accounts and business accounts is one of the easiest ways to pierce the liability protection.
4. Follow the rules. While the rules for an LLC are less formal than those for a corporation, you still need an operating agreement and it is still important to track and document your business decisions. For a Corporation, the rules are stricter, requiring bylaws, annual meeting minutes, and corporate resolutions. If you need support with compliance, let us know. We can help.
5. Ensure the business is adequately capitalized. If a business entity is under-capitalized and something goes wrong, the court may pierce the liability protection.
To learn more about maintaining the liability protection of your business through skillful business planning, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit. Normally, this session is $1,250, but if you mention this article and we still have room on our calendar this month, we will waive that fee.
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