This is a question we get asked on a regular basis; most commonly associated with rental properties. While there is no way to guarantee 100% protection of personal assets in a business situation, there are many steps you can take to ensure a high likelihood of success.
Oftentimes, people want to start a business, whether limited liability company or corporation because they have an asset that they want to receive income from, but keep separate from their personal assets. They have also heard that setting up the LLC or corporation will prevent any debtors from being able to collect on their personal residence or accounts. This can be true, but only if done properly.
LLCs and corporations are considered their own distinct legal entities, and as such, only the assets of that entity are eligible for collection by debtors. However, courts can “pierce the corporate veil” and hold individual owners liable for the debts of the company if they find that the business was not properly managed to maintain its status as a free-standing entity apart from its owners.
While the statutory requirements are minimal for LLCs and corporations, there are many things owners could and should do to help provide the best protection possible. First, in order to have a legal entity, it must first be registered with the Secretary of State. Sometimes you will want to do that in your state of residence, sometimes it may be beneficial to incorporate in a different state. The second thing every business should do is register for a tax ID number with the IRS, as well as with the state and local jurisdictions where the business will operate.
Additionally, a fully independent business will have its own bank account and corporate documents. This means detailed bylaws for a corporation and an operating agreement for an LLC. These documents outline the ownership, management, and operation of the business. After establishing these, every business should issue ownership certificates, and hold regular meetings with minutes to evidence its true treatment as a separate legal entity to help protect its owner.
These formalities are very important not only in businesses with many owners, but in single member LLCs and corporations as well. By taking the proper steps to make sure that your business looks and operates like its own entity; corporate documents, separate bank accounts, separate insurance, adequate funding, you can go a long way to ensuring protection of your personal assets from the assets of your business ventures.
If you have questions on how to best establish and operate your business to best shield you from personal liability of business liabilities, the attorneys at Runco Law can help answer the questions specific to your situation and provide guidance for your needs. You may Contact Us to set up an appointment to discuss your protection.