If you're a duck, act like it.
"If it quacks like a duck, then it is a duck. "
When it comes to operating your corporation or LLC though, sometimes if you just say you are a duck and you haven't been quacking like a duck, then a court might say you never were a duck in the first place!
Let me illustrate: You've been diligently and laboriously building your dream business. Things are going great until you get served with a lawsuit - personally. You think there must be a mistake since you've been operating your business as an LLC for years now. Unfortunately you learn the hard way that someone who is operating a company (whether an LLC or corporation) and doesn't operate it like a company, can be held personally liable for the company's liabilities - a concept known as piercing the corporate veil.
Fortunately it is easy to minimize the chances that your corporate veil will be pierced. Here are some best practices.
- Never co-mingle business and personal funds. If you operate your business under a legal entity, whether a corporation, Limited Liability Company, or a Limited Liability Partnership, it must have its own bank account. All business expenses (and only business expenses) should be paid out of this account. If this account runs low, then you can loan your business money or make a capital contribution. If you need money for personal expenses, then you can issue a distribution or dividend.
- Always sign contracts in your capacity as an (or the) owner of your company (ie "President" of your corporation or "Owner" of your LLC etc). Never just sign in your personal capacity. If you do so, then you can be (and usually will be) personally liable for performance of the contract, and your personal assets are on the line for any contract related disputes. For that matter, always use a contract when you do business with anyone - whether a client, vendor or partner. Not only will that minimize the chances of litigation in general, but it will put them on notice that you are doing business as a company, and not as an individual person.
- Always be loud and proud about your business. Make sure the full name of your company is used whenever you communicate with the public. No-one should ever have to dig around much to learn that you are doing business as a legal entity. This means using the name, complete with "inc," "corp," "LLC" etc on:
- Business cards
- Social media account profiles
- Always keep good records. As far as the law is concerned, your company has just as much legal standing as a human person. The only catch here is that while you can tell a person exists by looking at him or her, the only evidence of the existence of your company is documentation. So… this means that keeping good records is critical in your ability to demonstrate that your company really exists (and that you’re not just a human being pretending to be a company). Always know what your LLC Operating Agreement or corporate bylaws require of you to keep as far as records, but at a minimum you should always have:
- Articles of incorporation or formation (and amendments)
- Operating Agreement or Bylaws (and amendments)
- List of shareholders (corporation) or members (LLC), together with records of each person’s ownership of the company
- Financial statements for past three years (yes, this means you need to create them as you go)
- Tax returns for past three years
- All meeting minutes, resolutions and records of actions taken without a meeting for past three years
- All formal communications to shareholders/members for past three years
- Listing of board of directors/officers (corporation)
- Latest annual report to Secretary of State
So there you have it. Forming your LLC or corporation is just a good first step in protecting your personal liability interests. You must also continually follow best practices to make sure your company provides you the legal protection it should. The best practices in this post are a very good start in this direction. For advice tailored to your situation or company, please feel free to contact me for a consultation or legal success coaching session.