Setting up your business as a corporation or limited liability company (LLC) is a crucial way to protect your personal assets from debts and other liabilities incurred by your business.
The ability of a corporate entity, such as an S Corp or LLC, to separate and safeguard your personal assets is referred to as creating a “corporate veil.” When properly constructed and maintained, the corporate veil offers you vital personal liability protection from creditors, lawsuits, and other business disputes.
That said, the personal liability protection offered by these business entities is not absolute. Indeed, there are several circumstances in which a creditor can come after your personal assets to settle a claim against your business. When this happens, it’s known as “piercing the corporate veil.”
The corporate veil can be pierced if you commit fraud or intentionally misuse the protective status offered by these entities. Most of the time, the veil is pierced due to innocent mistakes, such as inadvertently mixing your personal and business affairs.
Here are three key ways to safeguard your personal assets from liabilities incurred by your company.
Observe corporate formalities
One of the most important ways to keep your veil intact is to strictly adhere to all formalities your corporate entity is required to follow. Business formalities include filing an annual report, adopting corporate bylaws, and keeping detailed records (minutes) of meetings where major business decisions are made. It is vital that you’re aware of and abide by these obligations.
Requirements for corporate formalities vary by state, with some states requiring much more than others. If these formalities are not correctly observed, a court can remove the corporate veil, leaving your personal assets vulnerable to business creditors. To help prevent this, we offer maintenance packages individually tailored to our state’s laws, which make adhering to these requirements as simple as possible.
Keep your personal and business assets separate
To keep the corporate veil intact, you’re required to keep your personal and business finances totally separate at all times. If not, a court can claim your business entity is nothing but a shell and remove the corporate protection shielding your personal assets.
Keeping personal and business assets separate means that you should maintain separate bank accounts for your company and your personal finances. You should also never use corporate funds to pay for personal expenses, such as your mortgage or credit card bill. Even depositing a check made out to your business into your personal account could be considered a violation. So, void commingling your own finances with those of your company at all costs.
When you work with us, we perform regular reviews of your company financials to be certain everything is being kept totally separate and your personal assets are protected.
Consider wisely whether to cosign a business loan or use personal assets as collateral
If you’re like most entrepreneurs, you probably don’t have access to a lot of startup capital. Given this, you may decide to take out a business loan to get your operation off the ground.
However, if you cosign on a business loan or personally guarantee a financial obligation for your corporate entity, you share responsibility with the company for paying it back. And if you default on the loan, business creditors can come after your personal assets to settle the debt.
Similarly, if you put up any personal assets like your home as collateral for a business loan, the property you use can be seized and sold to pay off your business creditors.
Keep the veil intact
With all of the different rules and requirements surrounding corporations and LLCs, you should be diligent about ensuring you’re not opening yourself up to be personally liable for your business debts. All it takes is one mistake to pierce the protective veil.
As your Business Lawyer, we can not only advise you about the business entity that’s most suitable for your circumstances, but we can also help you properly create and maintain your corporate structure, so your personal assets remain safe from liability. Contact us today to learn more.
This article is a service of Stephanie Scarborough, Business Lawyer. We offer a wide array of business legal services and can help you make the wisest business choices throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.