You face plenty of challenges as a small business owner. Finding ways to protect yourself against lawsuits is a major one. You may be able to add protection by structuring your business as a corporation or limited liability company (LLC). Both these entities may shield the owners’ or members’ personal assets from the company’s debts and liabilities.
The protection isn’t bulletproof, however. Regulatory requirements must be met, and separation between the owners or LLC members and the business must be clearly established. Evidence to the contrary could spell trouble.
The Corporate Veil
In the face of a legal challenge, if you’re not following proper protocol, a court may decide your business isn’t being operated as a separate entity from the owner(s) — despite the existence of a corporation or LLC. That could lead to a legal decision to “pierce the corporate veil,” a term that means the personal assets of owners, members, or directors can be used to satisfy business debts and liabilities.
Corporations must meet strict state compliance requirements regarding the following concerns — at the very least:
- Adhering to bylaws
- Conducting director and shareholder meetings
- Issuing stock and recording transfers
- Fulfilling annual state filing requirements
- Paying corporate taxes
Get your ducks in a row — and keep them there!
There are fewer requirements for LLCs, but members would be wise to follow the guidelines for corporations, rather than relying on minimum compliance requirements.
The best way to show that your business is operating properly is to document everything. Keep minutes of all major management meetings and maintain a formal record of all business activities and decisions. Keep these records with your other formal business documents (including contracts your company is party to) for a minimum of seven years. The recommended retention period for company legal and financial records is seven years — the legal look-back period for an audit by government authorities.
Owners, members, and directors need to keep these records for their own defense against potential audit inquiries that could spell big trouble — including big personal liabilities, with penalties and interest on top, and charged back to the individual owners, members, or directors beyond the corporate veil.
Capitalize but Don’t Commingle
It takes money to run a business. There are several ways to capitalize your business: You and the other owners or members might fund it, you might take out a loan, or you might find new partners who are willing to fund you. Regardless of what method you choose, be sure to document all important financial transactions.
Never commingle your personal assets with business assets. Establish separate bank accounts and credit cards for your business, keep property and equipment separate, and file separate income tax returns. You want to be able to withstand the scrutiny of an audit, and safeguard your personal self against a possibility of future fiduciary inspection or investigation of the business.
If you don’t treat yourself and your business as separate entities — separate legal and financial entities — neither will your creditors or auditors.
Where to Get Protection
Anyone owning a business — or starting a business — must get proper legal assistance from a corporate attorney. It’s also smart to get proper guidance from a qualified financial investment advisor. But the smart stuff all starts with basic bookkeeping and accounting! A reliable, knowledgeable CPA is the smartest and best path toward building your shield of protection and corporate veil. And you’ll want to correctly record those expenses for the legal and investment advice as they occur. Here at Baum CPA, we provide the expertise to recommend and support business owners every step of the way — from new venture planning and buildout, structuring the chart of accounts, and implementing practical and cost-efficient procedures for daily operations of the separate corporate entity. Just click here to schedule your consultation appointment. Do it today!
This blog and its authors provide this content strictly for informational purposes. No content herein should be misconstrued as financial advice. Everyone’s specific circumstances vary — Always consult with a qualified, licensed financial advisor, legal counsel, and tax professional before venturing into any investment or business activities.