Wednesday, July 29, 2009

Piercing the Corporate Veil - part 2

In my last post I looked at the factors involved in piercing the corporate veil. Now I want to focus on how you, as a business owner or director, can protect yourself. Some of these tips might seem obvious, but I recently ran into a case in which the owners were using the company as their own personal checkbook, so I guess this is not as obvious as it appears.

1. Money

Keep the company money separate from your personal money. Not only does this mean opening up separate accounts, but also giving yourself little reminders that keep the money separate. This includes using different banks for corporate and personal accounts so you'll know which is which just by seeing an envelope. You should even choose different check colors so you don't get them confused, even accidentally.

Once you have that set, do not pay your personal expenses from the company account. I know it might seem silly to write a check from the company to you personally and then turn around and write a check for the exact same amount for say,the home mortgage, but that is how it must be done. The amount of the corporate check is part of your salary and should be noted as such. If you lend money to the company or vice versa, write a promissory note. Again, I know it seems redundant writing a promissory note where you sign on behalf of the company and sign individually, but you must keep the money straight and your records accurate and complete. In addition, balance your check book regularly and review bank statements, even if someone else is helping you with the books. As I discussed in an earlier post, check fraud can be very detrimental to a business so pay attention to the money.

On the same theory, get a separate credit card for your business. Use it only for business expenses -- no exceptions!

2. Financing

If you create a corporation or a limited liability company be sure that the entity has adequate financing. That is, the company should be able to pay its own bills from its own checking account and should not take on obligations for which it cannot pay. This may mean that the entity needs to take a loan from you or obtain funding some other way (venture capital funding, angel investors). However the funding is accomplished, appropriate paperwork should be completed, particularly if you, the sole owner will be pouring your funds into this proposition.

3. Corporate formalities

A company must observe corporate formalities, meaning that you must have annual meetings and minutes from those meetings. If you want to take action, take a vote, create a resolution. Issue stock certificates. Run your company as if there were 500 stockholders and not just one and that each position of officer and director were filled by different, unrelated people. The treasurer is the one who should be in charge of he money; the secretary should maintain the corporate minutes. All this may seem horribly obvious, but these formalities and distinctions between you and your entity can quickly fade away when you are pre-occupied with actually doing what your business does. However, you cannot forget that you have to run and maintain the business part of your business in addition to whatever your business does.