There are many reasons to incorporate a start-up business. One of the biggies is to obtain limited personal liability for the founders and managers of the business. In practice, this means that the liability of the individual shareholders of the corporation (or the members of an LLC) will be limited to the assets of the corporation. In other words, the personal assets of the shareholders, managers, and founders (your house, your car, your Manolos, etc.) are largely protected in the event of a claim against the business.
So you've incorporated your new business. How do you keep that "corporate veil" intact so that your liability as a shareholder, manager, founder or member is truly limited...and remains limited? Here's a top 5 list to help out:
1. Keep good records about your business decisions. If you have incorporated as a corporation, you must have regular board of directors meetings and annual shareholder meetings. You must document major decisions about the business and keep meeting minutes (or unanimous written consents) in the company's record book. If you have incorporated as an LLC, the formalities are much less stringent, but you should still make sure you document major decisions and the agreement of the managers for those decisions.
2. Don't comingle funds between personal and business expenses. Although you might have obtained a Federal tax ID number (FEIN) and opened a bank account for your business right away, it can be tempting to be a bit loose your personal and business accounts. This is NOT a good idea. Just don't do it. You are asking to be audited at the very least. Keep everything strictly separate. Funding your business adequately in the first place will help you to do this.
3. Treat the business like the separate entity that it is. When you are presented with a new business opportunity, as an officer or director of a corporation, you have a duty to think of the corporation first. That is, before you think of pursuing the opportunity for yourself, you must first present it to the company - if it declines to participate, only then you can go after it yourself. Likewise, all financial interests in a proposed transaction by a director or officer of the company needs to be fully disclosed to the other directors before the board can discuss it and vote upon it. Be up front.
4. Be consistent with your company name. You need to sign documents, get stationary, do marketing and all other company activities under your formal corporate name. Definitely don't sign agreements under your name as an individual, as personal guarantees do not get you the liability shield. And if you are using any name other than the name you incorporated under, you will need to file a fictitious business name statement (otherwise known as a "DBA" or "doing business as").
5. Be legal. Don't engage in illegal activity or fraud. Having a corporation or LLC will only protect you so much. Fair is fair, after all.
Original Whereas post. Like any good lawyer, I have to let you know that this is not legal advice and that you should consult with an attorney in your jurisdiction for legal advice. Please see my site disclaimer for more.
