Protect Your Personal Assets
Many business owners start a business but fail to maintain their corporate books. This could have a devastating affect on their family and their personal assets.
The principal reason to have a corporation as the form of your business is to protect your personal assets from business liabilities. There are two recent example of how this works.
In one case, a creditor of the corporation filed a lawsuit to recover a corporate debt against the two shareholders of a company that closes doors. In that case the Court refused to pierce the corporate veil noting that the two shareholders had appropriate annual meetings, they did not commingle personal and corporate funds, and they have no indication that the corporation was not in compliance with the requirements of a corporation in Illinois.
So the message there is that as long as you maintain the formalities of a corporation your personal assets will be protected from creditors.
Let's look at another case in which the court did not hesitate to hold the individual shareholders liable because the corporation did not file the proper practices for maintaining a corporation. In that case there were no corporate records, there was a commingling of corporate and personal assets and there was non–functioning officer and director, the annual minutes were not kept and the appropriate records were not preserved. In that case it was easy for the court to look at the facts and say the corporation was just a sham and they pierced the corporate veil and held that the individual shareholders were liable for the debt.
So keeping your corporate books is not just paperwork. Our lawyers understand this. We are business litigators. We deal with these kinds of cases all the time and from our experience we understand that if you maintain all of the corporate formalities – and that goes for an LLC also – it will be virtually impossible for a creditor to come after you personally.
If you have a small business corporation or LLC, you must keep good minutes of meetings. You must document the reasons behind certain transactions that occur outside of the day to day management of the business. For example, transferring money from one account to another, salaries, loans, shareholder loans, purchasing equipments, purchasing real estate, or entering into a lease, all of these things require direction from the board of directors.
The corporation has to be properly capitalized. In other words, you just can not say that the corporation is capitalized at a thousand dollars and forget about the assets of the company. You must make sure that the corporation has proper capital in order to operate its business.
The next thing is that the corporations accounting books have to be up to date and they have to be kept at the principal place of business. One thing that is frequently overlooked, is that if nothing else there must be annual minutes of the directors and shareholders. This is part of the annual corporate minute process that shows the courts that you have been filing all the formalities of the corporation. Are there stock certificates showing that you actually have an interest in the corporation. Are all of the officers and directors actively engaged in the corporations business or are they just relatives you put on the corporation just to have somebody appearing as a corporate officer and director. Do you have the right amount of insurance? Do you keep your bank accounts separate from the bank accounts of the corporation? Do you pay your personal expenses out of the corporate account? And are all of the dealings between the corporations officers and you personally kept it in arms length.
These are thinks you must do. In our practice, we help individuals maintain the corporate identity by using what we call a corporate maintenance plan. We have a plan – our Corporate Maintenance Plan – and we have set it up to be a very economical aide to small business owners given the importance of preserving your identity as a corporation.
If you want more information, contact us. Bellas & Wachowski Attorneys at Law has the experience to help you protect your interests and your families interest.