If you own a small business, your personal assets can be seized to meet your business obligations. One way to avoid being personally liable is to form a legal entity. A corporation or a limited liability company (LLC) can meet this need.
However, forming a legal entity is not the end of the story. You still have to be careful to separate business activities from the personal.
Here are few things you should be careful to do:
- You have to comply with the rules set by your state for whatever entity you have chosen.
- Do not comingle funds: This means your business bank account should be treated separately from your personal bank account.
- Document all dividends or distribution in your minutes.
- Hold an annual shareholder meeting, even if you are the sole owner.
- Don’t use business assets for personal gain without properly accounting for it. Business assets used for personal gain is income to you unless there is a specific exclusion in the tax code.
- Be sure your corporations is reasonable capitalized. This means you have enough “meat in the game”.
- Do not personally guarantee business debt. This one is a tough one as most corporations owned by small business owners do not have enough history to get loans on their own.
- Be sure to add the LLC or INC behind your name, so people know your business is a separate entity.
To avoid personal liability for your corporation action, you cannot treat your business like it is an ATM. This means you should not withdraw cash as you see fit without having a proper system in place. Withdrawing money from your business should be part of an overall wealth plan. I always say making money in your business is not the hard part, the real challenge comes in keeping the money you have made.
Creating a separate entity for your business is only the first step to avoid personal liability for your corporations action. You also have to treat your business as a separate entity. Think of it this way, you do not withdraw funds from your best friends account just because he/she is your best friend. Why then would you treat your business like an ATM? Your business is not you and you are not your business.
If you need help, be sure to contact me.