How to prevent personal liability for the debts of your business?
Business & Corporate, Featured
By Rayan F. Coutinho, Ph.D.
a. Run the corporation like a distinct entity from the shareholders personally and from any other parent or subsidiary corporation. Basically, do not treat the corporation as your alter ego or merely a shell for the parent corporation.
b. Ensure that each corporate entity is held out to the public as a distinct and separate legal entity. The stationery, business cards, purchase order forms, invoices, checks, contracts and such other documentation should include the full legal name of the entity.
c. Each corporate entity should have its own bank accounts, own or lease its own equipment, and if possible, maintain separate offices.
d. Pay federal and state income tax and sales taxes.
e. When signing your name, ensure that you make it very clear whether you are signing individually, as an officer of the parent corporation or as an officer of a subsidiary corporation.
f. Follow all corporate formalities i.e. have and observe bylaws, minutes of shareholder and board of director meetings and actions. If you do not know what corporate formalities to observe, please call Wood & Lamping. Some major points to remember are:
i. Read and fully understand the Articles of Incorporation or Articles of Organization.
ii. Read and fully understand the Operating Agreement.
iii. Read and fully understand the by-laws
iv. Hold regular meetings and maintain minutes.
v. Ensure that all filings required by law are completed on time.
vi. Use corporate resolutions to authorize and document all major corporate acts.
g. Avoid inadequate capitalization. A corporation is inadequately capitalized at the time transactions with creditors or others wishing the corporate veil to be pierced were entered, or simply not enough capitalization to get the particular corporation running.
h. Maintain corporate records.
i. Ensure that unemployment insurance, social security withholding and such other items are paid on time.
j. Maintain arms length relationships with related entities.
k. Officers, shareholders or directors of the corporation must avoid criminal acts.
l. Do not commingle funds. Never put corporate money for personal use such as paying home mortgages or buying gifts for self or family members. Related entities must also avoid commingling funds.
m. Do not treat corporate property as your own.
n. Do not mislead vendors, customers and other affected people regarding the solvency of the companies or the financial wherewithal to perform on contracts.
o. Consider creating resolutions for major subjects such as:
i. Compensation of officers
ii. Authorization of important contracts
iii. Acquisition of property
iv. Loans and guarantees
v. Designation of banks
vi. Engagement of lawyers, accountants and other professionals
vii. Declaration of dividends
viii. Approval of mergers
ix. Issuance of shares
x.
xi. Authorization to sign checks, deposit funds, and make withdrawals
xii. Approval of financial statements and audit reports
xiii. Compliance with governmental regulations
xiv. Adoption of employee benefit plans
admin @ September 6, 2007