Although you can purchase a liability insurance policy so you don't have to pay out of pocket if you are sued, as a private individual, there is no real way to avoid personal liability for accidents you cause or that occur on your property.If you own a small business, you have more options.If you organize your business as a corporation, you can shield your personal assets from the debts of the business.The law allows individuals or other companies to pierce the corporate veil and go after you personally if they can prove that there is no real separation between the company and its owners.If you lose a lawsuit, you can end up bankrupting yourself even if you win.Make sure the business has enough capital to operate, and keep your business and personal finances separate, to avoid personal liability.
Step 1: Make sure your corporation is formed correctly.
Follow your state's rules for forming a corporation.You must have an initial organizational meeting with your owners or directors in which you adopt the company's bylaws, issue stock, and elected officers after you file the initial documents to form your corporation.Prepare stock certificates and keep a record of the shares that you issue.Corporations and limited liability companies are required to file certain documents in all states.The state has accurate records of corporations that operate within its borders.If you fail to file the required paperwork and pay the associated fees to the state, your corporation may be administratively dissolved, leaving you vulnerable to personal liability.You have to follow the filing requirements of the state in which you were incorporated, not just the one where you are located.If your business is incorporated in Delaware, you must follow filing and reporting requirements.If you register as a foreign corporation in another state, you have to follow all the filing and reporting requirements for that state.The same basic concepts apply regardless of the state.If you establish the company as separate from you and your finances, it will be treated as a separate entity.
Step 2: Board meetings should be held regularly.
State formality should be followed by your board meetings.The minimum number of meetings required by shareholders and directors is dictated by your state's law.It is possible to avoid personal liability if you have meetings for your business entity, even if states don't require them.You should have a formal meeting of the directors and shareholders at least once a year.Provide adequate notice to everyone required to attend by having your meeting at the same time each year.
Step 3: The corporate bylaw should be adopted.
If you've formed a corporation, most states will require you to file a bylaw with the secretary of state.The way your company is organized is outlined in the byelaws.A written code of ethics could be created by your company's owners.Make sure everyone on your board is aware of your rules.If you have formed an limited liability company instead of a corporation, you still have to create an operating agreement.This document has the same function as the corporation's byelaws.If your state doesn't require you to file it with the secretary of state, it's in your best interest to create one.
Step 4: All corporate activity should be documented in writing.
Corporate transactions should be documented and accounted for in addition to the board meetings.Even if you are in a family business, you still need to document meetings.If you and your spouse have created a corporation to run your bakery, all you need to do is agree on basic business decisions and write them down.Check your state's law to find out what functions can be carried out by officers on their own.If you and your partners are the only directors and shareholders, the decisions you make on a daily basis should be documented and in compliance with your state's law.Purchases or lease of real property, employment, service, and other business agreements should be kept together with your other corporate records.
Step 5: Define representative and corporate status.
All individuals should indicate their role when signing any documents if the corporate name is included.All official company documents should include the appropriate official designation such as "Inc." or "LLC" after the name of your company.The company's name and title should be included when individuals sign financial statements, checks, or other documents for the company.If she is the CEO of Kelly's Kupcakes, she would sign any documents as that person.
Step 6: Appropriate levels of insurance coverage can be purchased.
Although not required by state law, insurance can protect against under-capitalization and shield directors from personal liability for actions taken on behalf of the corporation.If a customer slips and falls on company property, general liability insurance can be used to protect the company.You can get away with smaller initial investments if you have enough insurance to cover potential liability.Errors and Omissions insurance protects corporate officers and directors from liability for actions they take on behalf of the business.
Step 7: Bring on at least one independent director.
Independent directors can add separation and legitimacy to family businesses.Even if you're a relatively small corporation, following the federal requirements for public companies can help ensure you don't face an attempt to pierce the corporate veil and make you personally liable.Since family businesses may be more vulnerable to personal liability, an independent director can provide proof that you are treating your business as separate and distinct from your personal finances.One of the most common factors courts consider when deciding whether to pierce the corporate veil is whether one person or a small family group is in complete control.
Step 8: Retain independent counsel.
You should hire a business attorney to represent the corporation.Your business attorney can give you forms that comply with your state's requirements.If the corporation is sued and you are named personally, you should seek an experienced business litigation attorney in your area.
Step 9: Determine your company's start-up needs.
If you don't have enough money to cover basic expenses, you risk personal liability.Basic start-up expenses for equipment and other items are included in the amount of money needed for a business.If you give this money yourself, make sure you allocate it to the business and expenses are paid through business accounts, rather than your own personal accounts.It's not necessary for your company to have a lot of money in the bank, but courts will look at a company that was never intended to be separate from its owners.
Step 10: It is a good idea to make a reasonable initial investment.
The expenses of your business should be taken into account when calculating your initial investment.The creditor may be able to pierce the corporate veil on a theory of unjust costs if your corporation is sued and doesn't have enough assets to collect.You can open yourself up to this risk if you don't adequately capitalize your corporation.If your company never had enough funds to operate on its own, a court will determine that it was never intended to be a separate entity from you, again opening you up to personal liability.
Step 11: Deposits from owners should be documented.
You want to classify funds provided by individual owners to pay corporate expenses as loans.If it becomes necessary for you or another owner to contribute additional funds to the business, for example to meet your payroll, draw up a contract identifying the money as a loan from the owner of the corporation.If you have more stock in the company, you can treat the additional capital as a purchase of additional stock.It may be subject to approval from the others if the percentages of equity are changed.If money deposited by an owner is not treated as an equity capital investment, issue a promissory note from the company to the owner and pay the money back as agreed.
Step 12: Don't guarantee loans personally.
If you assume responsibility for the repayment of debts, you risk personal liability for business transactions.Even if the court doesn't ignore the corporation entirely, if you have guaranteed a loan personally that creditor will be able to come after your assets if they default on the loan.
Step 13: There are separate bank accounts.
The corporate accounts should not be linked to your personal bank accounts.If you open the corporation's accounts at a different bank than you use for your personal finances, it will be easier to keep corporate and personal funds separate.A court can determine that your company is a sham if you don't keep a separation between your business and personal finances.You become liable for the debts of the business if you are a sole proprietor.
Step 14: Personal expenses can be paid from personal accounts.
Don't use your corporation's account or credit cards to pay for personal items.Keep accurate records of your business expenses and make sure you justify each transaction with a business purpose.If you have doubts about the business purpose of a transaction, use a personal credit card to pay for it and then ask for reimbursement from the company.Some business expenses aren't tax deductible.If your company is sued and it turns out you have been paying personal bills from your business account, the court may hold you personally liable.Don't deposit checks written to the corporation in your personal bank account.If the corporation owes you money, you should write a check from the corporate account to cover the amount.
Step 15: Personal and business assets are different.
You should not use your personal property for business purposes.A judge will be more likely to pierce the corporate veil and hold you personally liable if he or she has trouble determining which assets are yours and which belong to the company.If you operate a business out of land that is owned or leased by one of the owners, you should have a lease agreement in place.The business should pay rent according to the agreement.
Step 16: Disbursements from owners should be documented appropriately.
Repayment of a previous loan, payment for services, or a loan from the corporation to the owner should be considered when removing money from a corporate account.Money taken by owners should be documented the same way as deposits from owners.If the money is salary, bonus, or other pay, it should be paid to the owner the same way any other employee's pay is paid.If the corporation owes money, the amount should be documented and paid back to the owner in the form of a promissory note or loan agreement.If you are borrowing money from the corporation, you should draw up a loan agreement with a payment schedule and charge reasonable interest.