Three ways business owners invalidate incorporation protections

Entrepreneurs with business savvy know the power of incorporation. Businesses that are incorporated with their state as a limited liability company (LLC), C Corporation or S Corporation offer protection from liability to their owners. The business structure generally protects the business owners’ personal assets in the event a creditor or other liability goes after the business assets.

This is true in most cases unless the business owner does one of these three things:

  • Does not use the corporate name. You may have a laid-back approach to business, but a failure to use the business’ entire name can weaken the liability protections present through incorporation. This is particularly true for any contract or official documents. If the business is “Entrepreneurs Inc.” be sure to include the “Inc.” designation.
  • Fails to follow formalities. Depending on the chosen business structure, courts will require certain formalities for the business structure to survive a legal challenge. This can include establishing bylaws, keeping meeting minutes and issuing stock.
  • Has no respect for separation. If you want your business and personal assets treated separately by creditors and others who may attempt to pierce the corporate veil, you need to keep the assets separate. Do not commingle business and personal accounts. Pay all tax obligations through corporate, not personal, accounts.

In addition to liability protection, the right business structure can also offer tax advantages. Choosing the right business structure will depend on your business needs. An attorney experienced in business law matters can help with everything from choosing the right structure to putting together the documents needed for organization and operation.