One of the primary advantages of registering a business as an LLC or corporation is liability protection in the form of safeguarding a business owner’s personal assets from being reached by a business creditor or in the case of legal action. For instance, if an LLC borrows money and then cannot pay it back, the bank may be able to take legal action and seize the business’ bank accounts and other assets, but the assets and accounts of the LLC’s members are safe – the only money that the owner risks is the money that he or she has invested into the business.
Liability protection is possible because an LLC or corporation is a separate legal entity from its members or shareholder, otherwise known as the business owner. However, there are some practices an owner must engage in in order to preserve asset protection, and failure to adhere to those requirements could void the protection, subjecting the owner’s personal assets to any legal action taken against the business.
If a creditor can show that a business owner failed to properly maintain the business as a separate entity – commingling funds and treating the business’ assets the same as personal assets, for instance – then the creditor can “pierce the corporate veil” and reach any additional assets of the business owner. If the owner owns several businesses, and fails to properly maintain safeguards across more than one LLC or corporation, a creditor of one business may even be able to reach assets owned or invested in other businesses formed by the same individual.
Treating the Business as a Separate Legal Entity
Maintaining strict separation of business and personal assets is the best way to prevent creditors from piercing the corporate veil. While many businesses already know that they should keep business assets separate form personal assets, some business owners still fail to do so – maybe without even realizing it - leading to the aforementioned consequences.
Some of the most common actions that risk piercing the corporate veil are:
1. Using only one bank account for both personal and business purposes.
2. Mixing bank accounts between multiple businesses.
3. Depositing company funds or earnings into personal accounts instead of business accounts.
4. Transferring money between business and personal accounts without documentation.
5. Withdrawing funds from business accounts for personal reasons without documentation.
6. Using business funds, corporate credit cards, or writing business checks to pay personal expenses, or vice versa.
7. Moving assets between multiple businesses without proper documentation.
8. Issuing loans to company shareholders, directors, or other individuals or businesses without proper documentation.
Other Actions a Business Owner Can Take to Strengthen the Corporate Veil
In addition to engaging in proper organization practices to conduct a business as a separate legal entity, there are some other actions a business owner can take to improve liability protection in the event of any legal action.
1. Acquire business insurance with the sufficient coverage types and levels.
2. Protect personal assets by placing them in trust.
3. Use official title and business name when signing contracts on behalf of the company (i.e. signing as John Doe, President of ABC, LLC).
By engaging in proper business organization and utilizing sufficient asset protection strategies, an LLC or corporate owner will be able to benefit from the protections afforded by limited liability in the event of any legal action being taken against the business.
Regina Gordon Can Help Businesses Organize and Preserve Liability Protection If you are a business owner in New York, or if you have other personal or small business needs, Regina Gordon Law Office can help you form, organize, and protect your personal and business assets. We serve clients online throughout New York State, including Long Island, New York City (NYC), Brooklyn, Manhattan, Queens, Bronx and Staten Island. To discuss your goals, contact us at 347-770-7507 or submit an online inquiry today.