How to Effectively Manage Your Corporation or LLC (Limited Liability Company) to Maximize Your Personal Liability Protection
The most notable feature of corporations is that a corporation’s shareholders are protected from personal liability for the company’s debts and obligations. This is a valuable tool for businesspersons. In fact, the corporation developed historically as a means by which individuals could pool their investments in order to finance large business projects, while protecting the individuals from liability. Without this liability shield, individuals would be less likely to invest in companies and the projects they undertake; it would be a very different world without corporations.
Understand though that liability protection for corporation owners is not absolute. In a legal sense, a corporation is a legal entity separate from its owners. This separation, as we will learn, must be vigilantly maintained. Legal errors, personal dealings, ignoring formalities, failure to pay taxes, and other misdeeds and missteps can destroy the legal protection afforded to corporation and LLC shareholders, thereby exposing them to liability.
The Eight Most Important Liability Protection Rules for Corporations, LLCs and Shareholders
In order to maintain liability protection for you and other shareholders you should strictly abide by the following rules:
? The most important rule is to always endeavor to maintain the greatest degree possible of separateness between owner and entity. The single most common thread that runs through the veil piercing cases is the lack of separateness between owner and entity and the exercise of complete control by an owner over an entity. How can one maintain separateness? The keys ways are through thorough recordkeeping, and through the appointment of independent officers and directors.
? Pay creditors before you make distributions to owner. Corporations owe an important obligation to pay creditors before distributing profits to owners. Universally, state law will force a corporation owner to give back distributions of profits made to entity owners in lieu of paying creditors.
? Always hold yourself out as an officer/manager of the entity not as an individual. Sign documents in your capacity as a representative of the entity, not personally, i.e., ‘John Jones, President, OldeCraft, Inc.” You should always endeavor to prevent a creditor from arguing that you personally guaranteed an obligation. Identify your corporation in advertisements, correspondence, invoices, statements, business cards, your website, etc.
? Follow your corporation bylaws. A crafty creditor’s attorney can have an easy time asserting alter ego liability if you do not follow your own entity’s written procedures.
? Keep proper records. When owners and managers/officers meet, be sure to prepare minutes of the meetings. If the owners or managers/officers reach a decision, even informally, commit that decision to writing in the form of a written consent. Creditors wishing to pierce the liability veil will always seek to discover improper record keeping.
? Obtain and maintain a business checking account in the name of the entity. Furthermore, always keep your personal assets and entity assets separate. Also, if you operate more than one entity (many people do), keep each entity’s assets separate. Keep accurate business records for your entity.
? Always keep your company in good standing with the Secretary of State. A corporation is subject to administrative dissolution if it fails to meet its ongoing responsibilities. This means that you must always file all tax returns, including franchise tax returns, and file all periodic reporting forms. Also, maintain close contact with your registered agent and always pay their bills on time.
? Never allow a company that you own with debts outstanding to be administratively dissolved. These debts can be imputed to you personally if the company is dissolved. If you must dissolve a company, do it with the assistance of a lawyer, and follow your state’s formal dissolution procedures.
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Michael Spadaccini is the author of 8 books on self-help legal matters such as, Ultimate LLC Compliance Guide: Covers All 50 States (Ultimate Series), Ultimate Book of Forming Corps, LLCs, Partnerships & Sole Proprietorships, and Ultimate Guide to Forming an LLC in Any State, Second Edition (Ultimate Series).
You can view his Amazon Author Profile Here.
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