Conducting Your Business as a Corporation
The limited personal liability of a corporation isn’t ironclad. In the event the business ends up owing more money to a creditor than it has the ability to pay, the creditor will then look to the business owner. Under a legal theory known as “piercing the corporate veil,” if the business was not properly conducted as a corporation, a court may determine that the corporate form is just a sham and hold the business owners personally liable.
It is possible to prevent this from happening to your corporation. Just make sure you conduct business as a corporation would. Follow the tips in this article.
Follow The Rules
The state you are incorporated in, as well as any other state you do business in, will have requirements that you should comply with. Every year you will have to file a form indicating any changes in the directors and officers of your corporation. You must also keep current a registered agent for your business with the state. Filing these documents in a timely fashion shows that your business is really operating as a corporation.
You should also follow the rules of the corporation, known as the Bylaws. These will specify how and when shareholders’ and directors’ meetings are to be held. It is important to have these meetings. Any major business decisions, such as taking on a large debt, merit a board of directors meeting. This doesn’t have to be anything more than a brief meeting where all of the directors sign a copy of the minutes with a resolution documenting what the decision is. The meeting can also be conducted via conference call and faxes, if all of the directors can’t get together in the same place.
Keep Corporate Records
You should keep a corporate record book that contains your stock ledger, minutes of shareholders’ and directors’ meetings, copies of corporate filings, and any other corporate records. This record-keeping is further evidence that you have been operating your business as a corporation.
Make Sure Others Can Tell That the Business is a Corporation
This is one of the most important aspects of protecting yourself from personal liability. It is one thing for a creditor to claim that you should be responsible if he thought he was dealing with you as an individual business owner. It is a much harder claim to make if it should have been obvious to the creditor that your business was a corporation.
Make sure to use your full business name in business dealings. For example, don’t enter into a contract simply as J. Smith Enterprises. Make sure the contract says J. Smith Enterprises, Inc. When you sign the contract don’t sign it John Smith, sign it as J. Smith Enterprises, Inc. by John Smith, President. The other party to the contract will have a hard time claiming that it didn’t know it was dealing with a corporation that way.
Keep Business and Personal Finances Separate
This is another key factor in protecting the corporation. You must keep the finances of the corporation separate from your own. The corporation should have its own bank account. Business expenses, including your salary, should be paid from the corporate account. Likewise, you should not pay for personal expenses from the business account. If you want to take profit from the corporation to spend on personal items, you will have to declare a dividend.
If you are not used to conducting business as a corporation, it may seem like a lot to keep track of, but conducting the business properly can protect you from personal liability.