By: Sarah Stewart Legal Group
Business owners create businesses in order to separate their personal assets and liabilities from business assets and liabilities. But, if the owner doesn’t properly separate the business assets from his or her personal assets, the business owner can be found personally liable for debts of the business by a Court of law. In legal terms, this is called “piercing the corporate veil.”
What do you need to do to keep yourself and your business safe?
In determining if a business is actually separate from it’s owner, the court will usually look at and weigh 4 factors. If you ensure your business meets these factors of separation, you are well on your way to protecting your personal assets from your business liabilities and vice versa.
(1) Lack of Separation
In order to protect your personal assets from business debts and liabilities, your business assets must be separate. You will need to establish your business by registering it with the state in some way. You will also need to establish separate bank accounts. You need to be sure to pay business expenses with business funds and personal expenses with personal funds. You can, of course, pay yourself from the business, but it is best to do this by issuing yourself checks from the business. The main goal here is to make it clear, to everyone, that you are not your business.
(2) Lack of Capital to Cover Costs
If you do not keep enough money in your business account to cover typical business costs, you are at risk for piercing the corporate veil. Companies that did not have enough money to cover business expenses have been found, in some cases, to be shell corporations and the owners have been found personally liable for debts associated with those businesses.
(3) Used for Fraud
If your business is used to commit fraud, you may be personally liable for business debts and lawsuits. Please be sure to run your companies with integrity and abide by applicable laws.
(4) Failure to Observe Formalities
Some company structures require very little formalities, others require more. For instance, limited liability companies do not require you to have a Board of Directors or to hold board meetings and keep minutes, while C Corporations do. If you own a C Corporation and have not appointed a Board of Directors, and do not hold board meetings, you are at risk for personal liability for business debts and lawsuits. When picking your business structure, be sure to take into account all the formalities and tax implications that may come with choosing that business structure.
Business owners should be aware of the benefits of having a separate business entity to protect themselves from personal liability for business debts and lawsuits. They should also be aware of the practices they need to implement to preserve that separation, and follow the rules.
If you are looking to start a business, it is always a good idea to speak with professionals to help you decide how to structure your business for taxes and other business related issues.