PERSONAL LIABILITY. As a business owner, you may be exposed to personal liability for activities related to your business. As such, your personal assets may also be exposed to the risk of attachment, seizure, and sale. To reduce the risk of personal liability, consider creating a separate legal entity for your business and file a Declaration of Homestead for your primary residence if such is applicable in your state.
CHOICE OF ENTITY. There are several ways you may create a separate legal entity, including, establishing a Corporation or a Limited Liability Company [LLC]. Factors involved in deciding which business formation is right for you, include the following: is there foreign or US ownership of the business; how many owners of the business; is the business involved in international or domestic transactions; and other related issues. To find out about when two entities are better than one, click here.
SEPARATE IDENTITY. In giving birth to new Corporation or an LLC, you are, in the legal sense, giving birth to a “Person” with its own identity, its own tax identification number, and its own liability. One of the keys to reducing the risks of third parties “piercing the corporate veil,” is to treat the new entity as a separate legal Person. For example, open a new bank account for the new entity and all funds should be maintained separately, and avoid commingling business funds with the owners’ funds.
Also, purchase orders, letterhead, receipts, labels, advertisements, signage, contracts, etc., should reflect in a conspicuous manner (not as the trademark/brand necessarily) the full legal name of the entity, including the suffix (“Inc.”, “Corp.”, “LLC”, etc.), for example on the bottom of each the appropriate materials. In addition, as an Officer or Director of the Corporation or a Manager of the LLC, each contract you sign on behalf the business should be signed with your title describing the capacity under which you are signing, for example, “Sarah Smith, as President of Smith Wholesalers, Inc.” Any contract signed without such language may be deemed to have been entered into by you personally and any liability arising out of such a contact may be outside the scope of corporate or LLC protection.
There is more paperwork associated with corporate compliance than LLC compliance, in that there are additional formalities required in maintaining an “Active Corporation.” For example, a corporation must file the Articles of Organization, draft By-Laws, conduct annual Board of Directors meetings, keep records of meetings, file Annual Reports (different from financial Annual Reports) with the Secretary of State, etc. One basic rule to remember is that in order to have the protection of a Corporation you must “act” like a Corporation. Simply filing the Articles of Organization with the Secretary of State and paying the filing fee is not enough to protect you.
DECLARATION OF HOMESTEAD. Other means of protecting your personal assets include filing a Declaration of Homestead (if recognized in your State). As an example, in Massachusetts, a proper filing of a Declaration of Homestead at the appropriate Registry of Deeds, protects the equity in the primary residence of the owner/declarant from certain creditors.
Take steps to protect yourself and the assets you have worked hard to acquire. Create a separate legal entity and file a Declaration of Homestead (if applicable) today.