Are You Honoring Your Entity?
January 27, 2008 by Elizabeth Potts Weinstein
What is the legal entity of your business?
If you respond "I don’t have one" that means you are either a sole proprietor or a partnership (if there are two or more of you). You may need to form a new legal entity this year — but that is a topic for another blog post.
If you have business that is a separate legal entity from yourself — a corporation, Limited Liability Company (LLC), or another such entity — you need to be honoring that "separate-ness." Small business owners, especially one-person shops, commonly are being too casual about business practices, ignoring the "red-tape" of administering a corporation or LLC.
Why does it matter, especially if you are a one-person shop? If you do not jump through the hoops and act as if your business is a true legal entity separate from yourself, then a court may "piece the veil" and find that your business is NOT separate from you. In that case, you loose the limited liability protections of being incorporated or an LLC. And, a potential creditor can come after your personal assets to collect on business debts.
Are you making any of these common mistakes?
- Not keeping separate business checking, savings, and credit cards.
- Taking money from business checking account and spending it on personal items, instead of paying yourself a draw, dividend, and/or salary (as appropriate).
- Not re-executing contracts with vendors, contractors, and clients, when you upgrade from a sole proprietor to a corporation or LLC.
- Neglecting to hold board meetings or pass resolutions on business decisions (i.e., giving the Treasurer permission to open a bank account).
Grow Up! First Step
Review your business finances & records. Is EVERYTHING done in the corporation or LLC’s name, or are there any accounts or contacts still in your own name?
Tags: Asset Protection & Lawsuits
This is great advice - Thank you! I’m shifting from sole proprietorship to an LLC and this is very timely.