When Joe and Sue went into business, they decided to incorporate. The reason: they wanted to receive the legal benefits available only to a corporation or a limited liability company (LLC) and not to a partnership or sole proprietorship.
By incorporating, they created a separate legal entity that protected them from personal liability. If someone were to start a lawsuit because a business debt was unpaid, they wouldn’t have to worry about their own personal assets – their homes, cars and bank accounts. Only the assets of their business, J&S Enterprises Inc., would be at risk.
The same thing would be true if a customer were injured through an employee’s negligence: only the corporation’s assets would be exposed if there were a judgment for an accident not covered by insurance.
So it was a happy day when Joe and Sue left their lawyer’s office with the Articles of Incorporation and corporate record book for their newly created company. Fortunately, their lawyer also gave them something equally valuable to take with them: some simple guidelines for preserving the benefits of incorporation.
It’s amazing how many business people go to the trouble of establishing a corporation or LLC, but fail to follow up properly. They increase the risk that creditors and others may be able to pierce the corporate veil and seize the personal assets of the owners.
To help you avoid such problems, here are some suggestions for protecting your corporate or LLC status. Many of these suggestions are based on the principle that a corporation or LLC is a legal entity separate from its owners and employees. To enjoy the legal benefits of having a corporation or LLC, you must carefully maintain that separateness. You must always make it clear that you’re conducting business as an agent of the corporation and not as an individual. These pointers are worth keeping in mind:
Business name. Use the full and correct name of your corporation or LLC in correspondence and contracts. If your corporate name is J&S Enterprises Inc., don’t leave out the “Inc.” unless you’ve filed an assumed name or fictitious name certificate with the appropriate governmental authorities.
Banking. Maintain a separate bank account for your corporation or LLC. Have the company’s name printed on all checks. Be careful not to mix business funds with your own personal funds.
Signatures. Sign documents and letters as an officer of the company.
For example, a corporate contract should be signed this way:
J&S ENTERPRISES, INC., a Michigan corporation
By: (Signature)
Joseph Anderson, President
Property transfers. If a corporate shareholder or LLC member transfers property to your company, such as a computer or furniture, formally document the transfer by a bill of sale or an assignment.
Leases. If a shareholder leases a car, building or other property to your corporation, the board should approve the transaction, and a lease should be signed.
Loans. Sign promissory notes if you loan money to your corporation or LLC, or if you borrow money from it.
Employment. If a shareholder or member is to be hired by the corporation or LLC as an employee or an independent contractor, enter into a written contract. In the case of a corporation, have the board adopt a resolution approving this action.
Taxes. Make sure your company pays federal and state withholding taxes promptly. Officers, directors and principal employees of closely held companies may be personally liable for payment of withheld taxes if the company runs out of funds to pay these obligations.
Records. Keep your company record book up to date. If your business is a corporation, write up minutes or resolutions at least annually for shareholders and directors.
Co-signing. If your company borrows money from a bank and you’re asked to co-sign a promissory note, be sure you fully understand the extent of your personal liability in case the company defaults.
Annual reports. File your annual report on time with the proper state authorities. Otherwise, you may face fines and even dissolution of your corporation or LLC.
S Corporation. If you elect S Corporation status for your corporation to avoid a corporate income tax, be aware that the election (IRS form 2553) must be filed by the 15th day of the third month of your tax year.
Insurance. Check with your insurance agent to make sure you have public liability coverage, not only for property owned by the company, but also for property leased to the company and for your own property, which may informally be used for company business.
With a little extra effort and a small amount of paperwork, you can help preserve the benefits for which you formed a corporation or LLC.
