Starting a business or being a small business owner can be rewarding. But it also invites lots of risk. In unprecedented times it is crucial that business owners understand the importance of following corporate formalities to limit their liability on business deals gone wrong.

Many business owners understand that it is important to form an LLC or Corporation (an “Entity”) to avoid personal liability from creditors. Yet, forming an Entity is only the first step in protecting yourself from liability. In fact, if you do not follow corporate formalities, your company may not protect you from liability at all. Rather, your creditors will be able to recover money from you personally, as opposed to your business, by “piercing the corporate veil.”

In simple terms, piercing the corporate veil is when the court permits creditors to go after owners and/or officers personally when the business itself cannot pay its debts. If your company does not have an operating agreement or bylaws and annual meeting minutes, courts are much more likely to disregard your corporate entity. These corporate documents are essential in the upkeep and maintenance of your business organization because these documents are evidence to the court that your business is a separate and distinct entity from you individually.

Maintaining corporate records is just one piece to ensure that your business protects you from personal liability. Filing separate tax returns, requiring your corporate officers to perform their fiduciary duties, and refraining from using your business for personal expenses are always actions a business owner must be aware of when running their own business.

In the midst of this pandemic mitigating risk is one thing you can control. At Kennedy & Ruhsam Law Offices, our experienced business attorneys can walk you through the essential steps in maintaining the proper corporate formalities to ensure that you cannot be held personally liable for the actions of your business.

This article is not legal advice. If you have any specific questions related to your business, please reach out to Kennedy & Ruhsam law offices for assistance.

Questions relating to your business and transactional law can be directed to Madeline Meyer, JD, MBA at 651-262-2080.