Forming a business entity, whether a limited liability company or a corporation, is the first step to properly protecting your personal assets from business creditors. But simply filing the proper paperwork with the Secretary of State to form your business doesn’t automatically result in absolute protection of your personal bank accounts, automobiles, homes, etc.
If you fail to take certain specific protective steps, you may find a business creditor attempting to “pierce the corporate veil.” In reality, this legal theory is not as eloquent as it sounds—in short, a business creditor may have the ability to step around your corporate entity and file suit against you in your personal capacity, putting all of your personal assets at risk. The Charlotte civil litigation attorneys at Weaver, Bennett & Bland put together a list of common practices you should follow to prevent business creditors from “piercing your corporate veil.”
Don’t “Comingle” Funds
I’m sure you’ve met a business owner over the years who “lives out of his company.” This business owner uses his business bank account to pay his mortgage, his car payment, his kids’ college tuition, and other personal expenses. This is the quickest way to give your business creditors the ability to reach into your wallet.
Every business owner should maintain very separate business and personal bank accounts. If your business earns income, that income should go directly into your business bank account. If you have personal expenses, your business should never pay your personal, non-business related expenses. If you want to pay yourself or make a distribution from your company, feel free to do so—but spending money out of your business bank account for purely personal expenses will land you in hot legal water if you’re ever sued.
Follow the Required Corporate Formalities
Just like automobiles, business entities require “annual maintenance.” If you own a corporation, it’s necessary for you to keep annual meeting minutes, appoint a board of directors and officers, and keep track of various other corporate documents and operational records. If you fail to keep up with these requirements, you effectively hand creditors a powerful argument that the corporate veil should be pierced. If you’re not following the required documentation policies for your business entity, you’ll hear from business creditors that you should not be treated as a business at all.
Even limited liability companies—despite the fact that they don’t have the same onerous documentation requirements as a corporation—require a bit of annual maintenance. Renewing your registration with the Secretary of State each and every year will ensure you’re properly protected.
Although there are several other items to consider in preventing the piercing of a corporate veil, it’s always a great idea to purchase liability insurance. If a business accuses you of wrongdoing—whether it’s negligence, breach of contract, or any other sort of claim—then your insurance carrier is a great option and resource to reach out to.
In speaking with your insurance provider, discuss both business general liability insurance and insurance that covers you for any personal liability stemming from claims against your business. This type of insurance will ensure you’re fully protected from any legal bumps in the road that you may not foresee.
Matthew Villmer is a civil litigation, consumer protection, and business law attorney at Weaver, Bennett & Bland, P.A. Contact Matthew at Weaver, Bennett & Bland, P.A. at (704) 844-1400. The information contained in this article is general in nature and not to be taken as legal advice nor to establish an attorney-client relationship between the reader and Matthew Villmer or the law firm of Weaver, Bennett & Bland, P.A.
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