A mistake many entrepreneurs make is not having current legal documents. This makes them vulnerable to the piercing of the corporate veil. Corporations or LLCs are separate entities; the owners and managers have limited personal liability for the company’s debts. If the corporate veil is pierced you could be held personally liable for corporate debts.
Often, entrepreneurs’ legal work is not signed, is set up from the internet in a state to which they have no connection. The first step would be to review all the documents to make sure they are filed in the correct state. Downloading legal forms from the internet may seem like a quick and inexpensive alternative to working with a lawyer, but often these forms are filed in a state to which the entrepreneur has no credible connection. Corporation statues can vary from state to state, although most states require the same essentials in forming a corporation.
Another common issue with legal documents is having them signed. You would think this is a no-brainer, but often after searching for the correct documents, many entrepreneurs simply print them out and file them, without signing. Some think they will sign them after reviewing them with a partner or lawyer, but never get around to it. Then they operate as if those documents existed. Should the organization face bankruptcy or with contract or tort claims, these corporate structure documents will provide no protection.
Another reason the corporate veil may be pierced is if a court finds the owner is operating the business as if the corporation or LLC didn’t exist. If an owner fails to maintain a formal legal separation between their business and their personal financial affairs, the corporation or LLC could be found to be a sham. Make sure you aren’t paying personal bills from the business checking account, and make sure you are following all the legal formalities for a corporation, such as recording minutes of a meeting when making important decisions. If your incorporation documents have any other structures or procedures, make sure you are following them.
Small corporations are less likely than their larger counterparts to observe corporate formalities, making them more vulnerable to the piercing of their corporate veil. It’s important to comply with the rules governing formation and maintenance of a corporation including: adopting company bylaws; making sure that officers and agents abide by those bylaws; holding annual meetings of directors and shareholders or members; and keeping accurate, details records (called “minutes”) of important decisions made at those meetings.
A good practice is to review all legal documents on a yearly basis. Make sure they are signed and initialed where appropriate, they are filed in the correct state, and that you are following all the provisions included.