5 Steps to Preserve Liability Protection

Business owners of any size should make sure that they have protected their personal assets from business liabilities. This matters whether you run a multi-million dollar corporation with hundreds of employees or simply own a couple rental properties.  

Business owners often choose to operate their companies as a Limited Liability Company (LLC) or Corporation (usually as an S-Corporation), since these business structures provide what is known as a “liability shield”. However, a court can dissolve this liability shield (pierce the corporate veil) if the proper steps are not taken by the business owner to keep this shield in place.

If you operate an LLC or S-Corporation, be sure you have taken these five important steps to preserve your liability protection:

1.  Don’t use it to commit misconduct. If you use your business entity to commit serious misconduct or fraud, a court could likely “pierce the veil” and hold you personally liable for business claims.

2.  Always use the name of the entity on contracts and business communication.  Business owners should not sign contracts or any important business communication with their personal names.  Use the name of your LLC or Corporation in all business dealings so it is clear to third parties that they are dealing with an entity and not you personally.

3.  Keep business and personal finances separate.  There should be no overlap of business and personal finances.  Maintain separate bank accounts and records for your personal accounts and business accounts. This includes credit cards and other debt or loans associated with the business or personal property.

4.  Follow the rules.  While the rules for an LLC are less stringent than those for a corporation, a limited liability company still requires an operating agreement and needs to track and document its business decisions.  For a Corporation, you require bylaws, annual meeting minutes, and corporate resolutions.  Make sure that you file your annual report and keep your registered agent information up-to-date with the Colorado Secretary of State.  An easy way to do this is to sign up for email notifications. If you need support with compliance, let us know. We can help.

5.  Be sure the business is adequately capitalized.  If a business entity lacks adequate capitalization and something goes wrong, that may cause a court to pierce the veil of the business.

If you have questions about taking the right steps to protect your existing business or have not yet set-up a  business entity to protect your personal assets from business liabilities, call us today at 720-248-7621 to schedule an appointment to see how our firm can help you.