The single most important reason people use a corporation or limited liability company to do business is to safeguard the personal assets of the owners against potential claims of creditors of the business.
Both corporations and limited liability companies are separate legal entities, which provide a layer of insulation to protect the personal assets of the owners from the debts of the business. Forming the entity is a great first step, but it is critically important to maintain the integrity of the separate entity. If the affairs of a company become inseparable from the personal affairs of the owners, a court may set aside the company and expose the personal assets of the owners to the creditors of the business. This is commonly referred to as “piercing the corporate veil.”
Certain actions should be taken to avoid the possibility of subjecting personal assets to business obligations. Recommended actions include the following:
1. Maintaining the entity’s existence with the state of formation.
2. Conducting and documenting required meetings of shareholders and directors.
3. Corporate resolutions approving significant corporate transactions should be maintained in the corporate minute book.
4. Business bank accounts should be maintained; co-mingling business and personal funds must be avoided.
5. Ensure that all signatures on behalf of the business clearly designate that the individual signor is acting for the company.
Should you need assistance in determining whether you are taking the necessary actions to avoid subjecting your personal assets to creditors of your business.