Law and Small Business & Startups

Make sure your business protects you

February 29, 2016
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One of the primary reasons to form a corporation or limited liability company is to obtain limited liability protection, which offers protection for the owner’s personal assets from potential claims from the company’s creditors.

Most commonly observed among small business owners is the propensity to take actions that put their limited liability protection at risk. Losing limited liability protection can result from a failure to follow or observe the numerous rules and formalities. Often this is because of a lack of funds, time-constraint issues or a misplaced “I can do it myself” attitude.

Many small business owners fall into the trap of going without advice and answers they need, thus opening themselves to potential personal liability for company debt. With that in mind, here are some simple rules to ensure your business protects your personal assets.

Separate legal entity

Often sole proprietors fail to understand there is no legal distinction between the individual and the business (and all of the liabilities running a business entails) unless they form a legal business entity under the laws of the state in which they reside. If you do not operate your business as a limited liability company or corporation, your personal assets are exposed and at risk.

Correct contracting party

When entering into a contract, a frequent mishap is failing to identify the business part as the contracting party. When identified incorrectly, contracts such as leases or supplemental agreements, debts and other liabilities intended to be on behalf of the company can instead be interpreted as personal liabilities. An easy way to circumvent these potential problems is to always make the company the contracting party rather than the business owner.

Signing in the correct capacity

Despite naming the company as the contracting party correctly, there are still more details to be aware of when it comes to contracts. Often many business owners sign only their name without any designation of their title or capacity for entity at the end of the contract. When signing on behalf of your company, the signature block should contain the name and title of the person signing.

True ownership of assets

A common mishap among clients is forgetting to transfer assets to their company — the LLC and corporation is properly formed, but is without all of its assets. This can result in an undercapitalized company that could fail to provide the limited liability protection for which it’s designed.

Comingling of funds

This may seem like a no-brainer, but it is a common mistake among limited liability companies and corporations: keep your company funds separate from your personal funds. Company funds should be kept in a company account and used for company debts and liabilities. Personal funds should be kept in a personal account and used for personal debts and liabilities. Mixing personal and company funds in a single account or using one to pay for the debts or liabilities of another is dangerous and jeopardizes the company’s limited liability protection.

Maintaining appropriate formalities

Corporations act through officers, directors and other authorized agents. Limited liability companies act through members, managers and other similarly authorized agents. Be sure you have properly identified who has the authority to make various decisions on behalf of your entity. In failing to do this, you jeopardize the limited liability protection your company is designed to provide.

Filing the annual report

One of the easiest and often most overlooked or forgotten formality to adhere to is the need to file annual reports on behalf of the entity. Failing to file an annual report in a timely manner can lead to financial penalties against the business entity or even suspension or dissolution by the state. Filing reports may be tedious, but it is highly important and should always be done in a timely fashion.

Planning for succession

Entities without bylaws, operating agreements or separate shareholder agreements typically do not have a structure in place for dealing with unplanned or unexpected succession or change in ownership. Having a plan in place will allow this process to be less stressful and hazardous to the limited liability company or corporation should this situation arise.

As small business owners know all too well, there will always be bumps in the road. Although this list is not exhaustive, it does cover many of the basics for improving your personal protection through your business. When it comes to maintaining your company’s limited liability status, it is worth asking for help and taking preventive measures to be extra careful. With a seemingly infinite amount of potential mishaps and mistakes that can jeopardize your personal and company assets, it takes specialized legal knowledge and experience to skillfully navigate through the potential hazards.

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