The scandals swirling around some of America’s corporate giants lately has seriously threatened their long-term viability and in at least one case led to bankruptcy. While these headline-grabbing cases largely resulted from intentional deceit and ‘cooking the books,’ many local, smaller, privately held companies are also guilty of compromising their corporate integrity. Though their mistakes are typically unwitting, these smaller entities stand to suffer the same fate as their larger counterparts.
Corporations, limited liability companies and limited partnerships, regardless of size, should take several steps distinguishing them from individuals engaged in business.
People who set up these types of businesses usually do so to lessen the tax burden, protect individual officers and owners from liabilities of the business and/or take advantage of other benefits that may not be available to sole proprietors or other structures.
Maintaining that separate identity is key to enjoying the benefits. Without it, officers and owners may be held personally liable for the acts or debts of the business. Even more threatening, if someone sues the business, the person bringing the action may be looking to "pierce the corporate veil" and ultimately access the assets of individual owners or officers. In any case, be it a plaintiff or the Internal Revenue Service checking your practices, these parties will look to see if the business has been acting like a corporation (or limited liability company or limited partnership, as the case may be) in maintaining a distinct identity from its owners.
To maintain a separate identity, businesses need to take three key steps.
First, keep business finances separate from the finances of the owners.
Refrain from co-mingling personal and business funds, and be sure to keep a separate bank account for the business, along with separate accounting records.
Also, be consistent in identifying personal assets versus business assets. For example, if the business owns the car you drive, the business should also carry the insurance policy that covers its use and pay for its registration each year.
Second, follow rules for maintaining your legal identity.
Corporations, limited liability companies and limited partnerships should have at least one meeting per year of the owners, and minutes should record the discussions had and decisions made at the meeting. Discussions at these meetings may focus on salaries, benefit plans, major purchases, or simply offer a chance to review the past year and plan for the one ahead. The by-laws, operating agreement or other governing document may require more than one meeting each year.
Keeping board members and officers current is another critical, though often overlooked, rule. Frequently, officers who have moved or died or otherwise left the business have not been replaced.
Finally corporations are required to file annual reports with the state. Be sure to submit these and any other reports timely and consistently. Failure to do so could result in an unwanted dissolution.
Third, make sure vendors and other third parties know they are dealing with a separate legal entity rather than an individual.
Whatever your status (i.e., a corporation, limited liability company, etc.), it’s important to communicate that to the parties with whom you conduct business. Your status should be included on business cards, invoices, letterhead and vehicle lettering. In addition, whenever signing documents for the business, such as loan papers, contractual agreements, etc., sign as an officer for the business rather than as an individual, indicating the name of the business and your official title.
Neglecting any of these three steps could eliminate the protections afforded as a corporation or other entity, removing the benefits and protections you originally sought when obtaining that status. By taking the time to ensure your company’s distinct identity, you not only protect the company’s integrity, you also protect your profits and your future.