Well, I ended up being right about the Cavaliers not having enough fire power to beat the Warriors. The Warriors beat the Cavs last night to wrap up the NBA finals. Now we to wait a long four months before next season. Most likely the Warriors will be the favorites to win again unless the Cavs or other teams make some major reconfigurations
This week I wanted to discuss a recurring theme I see with many small businesses. This issue has significant ramifications yet gets ignored by a great deal of small business owners. What is it you ask? The issue is “Piercing the Corporate Veil”. Most non-accountants probably have never heard of this phrase so let me explain briefly. When a business is formed (corporation, LLC, etc), the entity becomes a living, breathing entity just like a human being. The owners must continue to treat the entity separate from themselves. If a court finds that you do not keep the entity separate, then the owner may end up losing its liability protection in a potential lawsuit. In short, this means all of your personal assets would be exposed. So how do you prevent this? There is no hard and fast rule, but here are some of the basics you should follow (note that I will be referring to corporate shareholders, LLC members, and partners as owners):
- Owner meetings. Start with holding an initial meeting and follow up with annual meetings. Be sure to document what happens at the meeting in your records.
- Create corporate bylaws or partnership operating agreements. Be sure to advise your lawyer to tailor these items to the needs of your company then document in your records.
- Keep records of ownership. Issue stock certificates and/or partnership interest documents to each owner. Be sure to state the number of shares/units the owner will have along with the amount contributed to the entity to obtain the ownership.
- Sign documents on behalf of the entity. Any legal document between your company and another company/individual should be signed by you on behalf of the entity.
- Document owner transactions. Any amount paid to the owner should have a paper trail. If an owner is borrowing money or loaning money to the company, make sure there is a true legal document in your records. On top of this, charge at least the minimum interest rate as prescribed by the IRS.
- Accounting records. Keep all documentation such as receipts, invoices, check stubs, etc in your records to support your internal accounting records. Also, make sure you have financial statements (balance sheet, income statement, etc) in your records as well.
- Do not commingle funds. Setup separate bank accounts, debit cards, credit cards, etc in the name of your business for all business transactions. Pay all business expenses from these accounts. If you make a mistake and use your personal account, reimburse yourself as soon as possible and keep documentation of the reimbursement. On the flip side, pay all personal expenses from personal accounts. For instance, if you are paying a personal credit card with business funds, take a draw from the business to your personal account instead of paying the credit card directly.
- Do not commit fraud. Even if the fraud is related to a business transaction, if you act recklessly or dishonest, a court may be not allow the liability protection in certain cases.
- Capitalize the business adequately. If the entity never had enough funds to operate business, a court may find that the entity doesn’t truly “exist”.
The above is not an “end all, be all” with regards to “Piercing the Corporate Veil”. It is best to talk to your lawyer and accountant to ensure that you are taking all the necessary steps to protect your personal assets. Take the extra time to implement your trusted advisors suggestions – it will be well worth the extra time and hassle in the end.
If you have any questions please feel free to contact me directly!
