Are you going to lose your liability shield?
You filed with your state as an LLC or a Corporation (I'm going to talk here using the language for corporations, but for LLCs just substitute the word "company" where I use "corporation" and the word "members" for where I say "shareholders"). You know that you need to keep your corporate books up to date, have your shareholder meetings once a year, you're right on track. If you're sued, you've got liability coverage. At least that's what you've been told. Are you really protected?
Not necessarily. If you are a small, closely held corporation (1-3 members/shareholders, usually), if you're sued, it is likely that the attorney on the other side is going to say that your corporation is a sham, that it's merely an "alter ego" for you personally and that the court should disregard the corporate form and hold you personally liable. Freaked out yet?
I just want to impress upon you how hugely important it is to keep up with your corporate formalities. There are quite a few factors that the courts look at in deciding whether to pierce the corporate veil, but the big ones are whether you are maintaining an arm's length in transactions between you and the company (i.e., whether you are using the corporation's funds as your own, whether you're taking benefits from the corporation that you're not entitled to, etc.).
If you want to avoid having your corporate veil pierced, it's very important that you treat the corporation like the separate entity that it is. This is easy to say and difficult for many business owners to understand.
Here's what I always suggest to my clients. Pretend that your corporation is another person. Let's call him Bob (fwiw, I always call him Bob. I'm not sure why). Bob is your employer and you helped back Bob, so you are entitled to a share of Bob's profits. Bob needs to have his own bank accounts. Bob pays you a salary or dividends on a regular basis. Bob keeps track of money that he spends, whether it's on distributions to shareholders or any other expenses. If you spend your own money to buy something for Bob, you submit your receipts to Bob and Bob pays you back. Get it?
The more you're able to treat Bob like a separate person, the less likely you will be found to have been treating the corporation like your alter ego and the more likely that you will maintain your corporate shield in the event of a lawsuit.
And that's a VERY important thing...
Not necessarily. If you are a small, closely held corporation (1-3 members/shareholders, usually), if you're sued, it is likely that the attorney on the other side is going to say that your corporation is a sham, that it's merely an "alter ego" for you personally and that the court should disregard the corporate form and hold you personally liable. Freaked out yet?
I just want to impress upon you how hugely important it is to keep up with your corporate formalities. There are quite a few factors that the courts look at in deciding whether to pierce the corporate veil, but the big ones are whether you are maintaining an arm's length in transactions between you and the company (i.e., whether you are using the corporation's funds as your own, whether you're taking benefits from the corporation that you're not entitled to, etc.).
If you want to avoid having your corporate veil pierced, it's very important that you treat the corporation like the separate entity that it is. This is easy to say and difficult for many business owners to understand.
Here's what I always suggest to my clients. Pretend that your corporation is another person. Let's call him Bob (fwiw, I always call him Bob. I'm not sure why). Bob is your employer and you helped back Bob, so you are entitled to a share of Bob's profits. Bob needs to have his own bank accounts. Bob pays you a salary or dividends on a regular basis. Bob keeps track of money that he spends, whether it's on distributions to shareholders or any other expenses. If you spend your own money to buy something for Bob, you submit your receipts to Bob and Bob pays you back. Get it?
The more you're able to treat Bob like a separate person, the less likely you will be found to have been treating the corporation like your alter ego and the more likely that you will maintain your corporate shield in the event of a lawsuit.
And that's a VERY important thing...
posted by Deena B. Burgess, Esq. at
9:14 AM
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