Avoiding Personal Business Liability

In the eyes of the law, many business entities are considered to be separate “persons” from their human owners. This is an important concept to master, since it explains many of the procedures with which owners of S-Corporations and Limited Liability Companies must comply.

Owners of corporations and limited liability companies are afforded protection from personal liability for the liabilities of the business. For example, if the business is sued, only the assets of the business are at stake, not the homes, IRAs and other personal assets of the owners. This is known as the “Corporate Veil”. It can be viewed as an acknowledgement that your business entity is not you; it is a separate person.

However, in order to maintain this protection, the law requires the company and its owners to comply with certain rules. Some of these rules are as follows:

  1. You must use the initials, “LLC”, “Inc.” or “Corp” after your business name, consistently. It must appear in your advertisements, your business cards, your invoices, everything, so that the world knows that this company is not a sole proprietorship or partnership.
  2. You must maintain separate banking accounts for the company. All income to the company must be deposited into the company account, never into personal accounts. All debts of the company are to be paid from the company account, never from your personal account. Everything is separate, because, after all, you and the business are two separate people.
  3. Whenever you sign contracts, leases or other agreements on behalf of the company you must never sign with only your name. You must put the name of the company above your signature (using LLC, Inc., or Corp after the name), so that it is clear that it is the company which is being bound by the contract or lease, not you personally. Again, the company is a different person.   Sign with only your name and you are personally liable for that contract. This defeats the purpose of forming one of these entities.
  4. You must register with the State, annually. Every year the State will send you a letter requiring you to file an annual report. The report is done online and costs $50.00. If you fail to do this for two years in a row, the State will revoke your charter, meaning you will no longer be an LLC or a corporation. This will expose you to serious personal liability.
  5. Corporations are required by law to hold an annual meeting of shareholders and of the Board of Directors. Failure to do so, and to keep minutes of these meetings, will allow an adversary to pierce the corporate veil and reach the assets of the owners. After all, if you are not acting like a corporation, you shouldn’t get the benefits of a corporation. This is true even if the corporation only has one or few owners.
  6. Limited Liability Companies should have an Operating Agreement. This is an agreement by the owners about how the company is to be run. Can an owner sell his or her interest without the permission of the others? What happens when an owner dies (do you want a spouse coming in to run your business?)? How are profits to be divided? Better to answer these issues at the beginning of your relationship, rather than wait until a problem develops. If you don’t have an Operating Agreement, the laws of New Jersey will stand in its place and decide these issues for you. You may not like the result.

There are many other issues and requirements which need to be acted upon. These are the major concerns. You need to get this right and run your business in compliance with the law. Your failure to do so can be disastrous to you personally and to your family. Law Offices of Robert J. Shanahan, Jr., LLC can help.