Act like a Business

OK, so you have set up a corporation or LLC to limit your liability.  You want to protect your personal assets from business debts.  Now what?  There is more to running a LLC and corporation than just filing your annual report and corporate tax returns.  Sometimes courts will hold an LLC or corporation's owners, members, or shareholders personally liable for business debts.  When this happens it's called "piercing the corporate veil” and it is ugly.  Now your house, car and retirement fund are all exposed to your corporate debts. 

You have to act like a business!!!  Courts might pierce the corporate veil and impose personal liability if there is no real separation between the company and its owners.  If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham and that the owners are personally operating the business as if the corporation or LLC didn't exist.  For instance, if the owner pays personal bills from the business checking account.  So, if you are doing this, it’s time to stop.  Your corporate credit card and bank account should only be used for business expenditures!

So, what do I do? you ask.  To stay out of trouble it's important for small corporations and LLCs to comply with the rules governing formation and maintenance of a business entity, including:

•          holding annual meetings of directors and shareholders or members
•          keeping accurate, detailed records (called "minutes") of important decisions
•          adopting company bylaws and making sure that officers and agents abide by those bylaws.
•          DO NOT comingle assets.  Your entity should maintain its own bank account and you should never use the company account for personal use or deposit checks payable to the company in a personal account.
•       Make sure the world knows it is dealing with a corporation or LLC by conspicuously identifying the company status ("Inc.", “PC” or "LLC") on all forms of company communication.  When signing company documents, clearly state your representative capacity (such as, "Jane Doe, President, Acme LLC.")

And, just in case you don’t like keeping business records, a decision on veil-piercing was handed down in 2014 by the Massachusetts Appellate Division, in Kosanovich v. 80 Worcester Street Associates, LLC.  The court pierced the veil of a single-member LLC based on only one factor: the LLC’s failure to maintain business records.