The main motivator for incorporation for many small business owners is for asset and liability protection. It doesn’t matter if your business is full-time or if it is a side hustle, your risk for a lawsuit is just as real. You wouldn’t want your house or personal property to be exposed to risk from customers and creditors, would you?
Just because you form an LLC or Corporation doesn't mean that you are 100% protected from personal liability Click To Tweet
Just because you form an LLC or Corporation doesn’t mean that you are 100% protected from personal liability though. In certain situations, courts can ignore your limited liability status and hold members, officers, directors or shareholders personally liable for business debts. They call this piercing the corporate veil. If this happens, it means that creditors can go after the business owners’ home, bank account and/or other assets to satisfy the business debt.
Factors that courts consider in piercing the corporate veil include:
- Whether the business engaged in fraudulent behavior
- Whether the business failed to follow corporate formalities
- Whether the business was actually funded and treated as a separate entity
To reduce the likelihood of such liability, you have to make sure that you adhere to all the rules and procedures that come with business formation and also keep your business separate from your personal life.
First, make sure that you ALWAYS use your business name when you are doing business.
Second, make sure that you follow ALL corporate formalities. You should have an operating agreement if you are an LLC, or bylaws if you are a Corporation. For corporations, make sure to record your meeting minutes and issue stock properly. For both LLCs and Corporations, make sure to keep your funds totally separate from that of your business. Business Funds should NEVER be in the same bank account as personal funds. Keep taxation separate! Your corporate taxes should never be paid from a personal account. Also pay your business’s bills from your business account and your personal bills from your personal account. Making these distinctions distinguishes your business as a unique entity for liability purposes.
All of the legal procedures can be overwhelming, but they don’t have to be. You don’t have to do it all by yourself. Protection your business and protecting yourself from liability is important so allow the StartUp Pro to help you form your LLC TODAY. Let me take care of your paperwork while you focus on the growth of your new business. Contact me today!
Learn about the difference between each business entity here.