What Needs to be Done to Preserve Limited Liability Protection?

Indiana and other states provide that the owners of corporations and limited liability companies (shareholders and members, respectively) generally will not have any personal liability for business debts.  The law treats such businesses as separate legal entities, and this limited liability protection is a very important reason that most business owners will be better off by forming their business as a corporation, limited liability company, or other entity where limited liability protection is afforded then to conduct business as sole proprietors or general partners.

The limited liability protection is based upon the assumption that the business will be run separately from the personal accounts of the owners.  When business owners fail to take reasonable steps to maintain the separation between their personal and business activities, debtors of the business may seek to “pierce the veil” of the corporation or LLC, and thereby seek to collect from business owners personally for money owed by the business.

Clearly, business owners would prefer to never become potentially subject to business debts.  As a result, here is what business owners can do to minimize that possibility.

Steps that You and Your Company Should Take to Minimize the Risk of Personal Liability for Business Debts

Here is a list of actions that business owners should take:

  • Keep a separate bank account or accounts for the business
  • Maintain a ledger of accounts for all business activities
  • Pay all business debts from the business accounts.
  • Note – it is perfectly acceptable that some business debts – such as those for travel or for miscellaneous expenses – be paid by an individual first and then reimbursed by the company upon presentation of a reimbursement form and receipts.  In general, though, primary business expenses – such as payments owed to vendors or employee salaries – should be paid directly by the business, not by a business owner.
  • If the business is in need of additional money from an owner, funds can be contributed as additional capital or a loan – check with your CPA and make sure this is properly documented.
  • Do not pay for personal expenses from company accounts
  • Discuss withdrawals of money with your CPA – depending upon the circumstances, distributions can be done through dividends, repayment of loans, or other owner distributions.
  • Proper withdrawals should go directly from the business account to your personal account (and not, for instance, from the business account directly to the payment of your mortgage or car loan)
  • Hold annual meetings
  • If your business is a corporation, you should have annual director and shareholder meetings (or what is known as an “action by written consent in lieu of meeting”) to elect or appoint directors and officers, and to observe other formalities
  • Make sure to timely make all required corporate, LLC, tax, and other filings
  • If your business will have employees, observe all tax and employment regulations, particularly those concerning employment, withholding, unemployment, and other matters.
  • Business contracts should be in the name of the business, not the business owners
  • Avoid making questionable “business expenses” that are primarily for personal benefit.
  • For instance, buying a hot tub for your home and trying to characterize that as a “business expense” probably is not wise.
  • If you have a question about an expense, discuss the same with your CPA

The forgoing are only some of the actions that should be taken by business owners.  Your role as a business owner is to ensure that strict boundaries are maintained between your company and your personal life.

How We Help Business Comply with Legal Formalities

We help businesses and their owners comply with many of the legal formalities, such as helping draft annual meeting minutes and filing annual corporate compliance documents.  We would be happy to meet with you to discuss the particularly formalities that may be important for your business.

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