May 22, 2014
Our clients form and do business in the name of corporations and limited liability companies for a variety of reasons, but one primary motivation is to achieve the benefits of limited liability protection that the entity offers.
Optimally, limited liability protection means that the exposure of the investor/owner in a corporate entity is limited to his capital contributions and personal loans to the company, and that his personal assets beyond those are not exposed to voluntary and involuntary liabilities, which are addressed immediately below.
- Voluntary liabilities are just like they sound — those undertaken willingly: e.g., a real estate lease, a contract to buy equipment, a bank line of credit, and a professional services contracts. Primarily they arise from contractual relationships.
- Involuntary liabilities are not typically contractual, but are tort and statutory liability such as industrial accidents, employment discrimination claims, and regulatory enforcement actions.
For both types of liabilities, a member of a limited liability company or shareholder of a corporation can cause (intentionally or unintentionally), the “corporate veil” to be pierced.
This entry explores ways to protect that “corporate veil” of limited liability protection, but before we get there, one more introductory comment is appropriate. Frequently clients tell me something to the effect of: “Oh, why bother with a corporation, the Courts will bypass that anyway and come after my personal assets.”
As a broad principle, this simply is not true. Ohio Courts and courts throughout the nation have been pretty vigilant in protecting the corporate veil of owners of corporations and limited liability companies. The protection is powerful, and very difficult to penetrate.
So, forming and properly respecting a corporate form is an important “Pillar of Strength” of your investment strategy for your business. Here are a few tips to assure that the “corporate veil” is protected of your business entity:
- Read here the proper way to sign every contract your company signs to assure respect of the corporate entity.
- Carefully consider any request to sign a personal guarantee, as this will indeed give rise to full personal liability.
- Every contract your company signs should clearly be in the name of the company (not your name personally) and use the corporate form of signature (see #1, above).
- On your printed materials (letterhead, business cards, brochures) note your company name as “XYZ, Inc., an Ohio corporation.” This is to assure for both voluntary and involuntary liabilities you have properly identified to everyone with whom they are dealing.
- Do not use the corporate checking account as a piggy bank for your personal finances. Take money out only as regular pay checks or corporate distributions. So, don’t pay personal expenses from the account (such as a dry cleaning bill), or put non-corporate income into the account. This “no-no” is a key element of the “alter ego” analysis in which Courts will engage when a Plaintiff undertakes the difficult task of piercing a corporate veil.
- For corporations, have annual meetings and other meetings required by the corporate documents, an d maintain corporate minutes of those meetings and approvals of significant corporate contracts and occurrences. The Ohio limited liability company statute dispenses with this requirement for LLCs.
Read below two related topics:
- Pillars of Strength: Three tips for protecting your personal assets when forming and operating a company.
- Pillars of Strength: Formatting a corporate signature to protect the “corporate veil.”
Please contact us to learn more about how to protect your assets when forming and operating a business.