Protecting the Corporate Veil

One of the primary benefits of incorporating or forming an LLC is the protection of the business owners personal assets from lawsuit. The main problem is that most entrepreneurs simply file the initial paperwork and then completely drop the ball on properly maintaining their corporate veil. This same rule applies whether you have a domestic, Delaware or Nevada Corporation or LLC.

In this article are listed ways to maintain the corporate sheild:

  • Be sure that you always conduct business through and in the name of your entity rather than in your own name (unless you are a sole proprietor). Failure to follow the rules for the entity allows creditors to try to deny you liability protection because you did not really conduct business as an entity.
  • Always have the entity adopt resolutions to authorize action, even if there is only a “ratification” after the fact.
  • Use the proper form of entity signature by always signing documents in representative capacity as an agent of your entity: “XYZ LLC, by John Q. Smith, Managing Member.”
    Use proper signs, advertisements and business cards showing an entity rather than an individual (e.g., “John Smith, President, ABC, Inc.” rather than “John Smith, Owner/Proprietor”).
  • Use proper fictitious name filings.
  • Avoid commingling your business and personal funds in the same bank account.
  • Pay business and personal bills from separate accounts.
  • Maintain separate personal and business bank accounts.
  • Prepare notes and other documentation of all loans between the business and its owners.
  • Your entity must have a minimum capitalization reasonably adequate for the business to be conducted. Insurance counts.
  • Don’t sign contracts or make commitments for the business until you have filed the correct papers to organize it, since you will be personally liable. The liability shield of the corporation or LLC does not exist until the entity exists through a filing in the state capital.

Of course, our clients would already know this as a “compliance checklist” is included in the free handbooks included with every formation of a corporation or LLC that we handle.

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