Lawyer and professional coach Glen Keene gives practical tips to businesses about improving customer and employee relationships and expanding their customer base and more.
Do you take great pride in the business you’ve built? Are people in awe of your success? Having a successful business is something to be proud of. If you’ve created an entity for your business you have taken the right step. Your small business may reflect your personality, however, remember that your company is not you nor is it your alter-ego.
A business entity (corporation, LLC, etc.) is a creature of statute, a legal fiction, as it is called. It exists at the will and whim of the state legislature and is governed accordingly. It stands in its own right. It is taxable separately from the owner(s) and is responsible for its debts and obligations.
Why is this important? A primary purpose of the legal fiction of the corporation is to provide liability protection to the shareholders for the actions of the corporation or, more appropriately, for the actions of its owners and employees taken on behalf of the company. It is a shield from creditors and others who may have a claim against the company. When properly formed and operated the shield will protect the personal assets of the shareholders and officers from attachment to satisfy the debts of the company.
The alter-ego question can become an issue in many situations, especially those involving tax audits and litigation. If you as the owner fail to properly separate your personal finances and records from your company’s it could spell TROUBLE. In circumstances where it is warranted courts will ‘€˜pierce the corporate veil’ and reach behind the corporate shield holding the shareholders and officers personally liable for the company’s actions, debts and obligations.
To avoid losing the protection of the corporate shield or to prevent the alter-ego question from coming into play the following are some of the more important things the shareholders and officers must do.
Maintain proper record keeping. This is a common problem in the small business world. Often records are kept haphazardly, if at all. Income records, receipts, bank statements, contracts, agreements, employee personal information, sensitive customer and client information, tax records and other corporate documents should be keep securely in an area not assessable by your clients, customers or other people, such as vendors, who may come to your office or location. Keep these records under lock and key if possible or when necessary. The company’s records do not have to be perfect but they do have to be in order.
Paying personal obligations from the company account is not a good idea. Those who have a home based business should be extra careful in this regard. If your utilities, mortgage, casualty and liability insurance are in your personal name the wiser choice is to pay those bills from your personal accounts. Then, calculate the reimbursement amount due from your company and pay the reimbursement from the company accounts, making proper note of the purpose of the payment.
Co-mingling your personal funds with the company’s is asking for trouble. Even if you are maintaining thoroughly detailed records of the transactions this is just not a good idea. An IRS correspondence audit, the least intrusive form, can easily turn into a field audit, the most intrusive. Once an IRS auditor is in your office all bets are off. The state can also conduct an audit that can be just as intrusive and costly.
These are what I see as the more important steps to follow. There are other things you as the owner(s) should do. This list is by no means comprehensive. When in doubt use common sense. Any questions you have about other steps to take should be directed to the company’s accountant or attorney.
Glen is an attorney, certified professional coach and host of ‘€˜Spotlight on Success’ streamed live every Wednesday at 6:30p from RocklandWorldRadio.com. Glen’s guest on May 2 is Ralph Spano, Master Plumber and owner of Sunshine Plumbing and Heating, Inc.
This article is for information purposes only. No legal advice is intended nor may it be assumed or implied.