July 01, 2011 — When Joe and Sue decided to open a photography studio, they also decided to incorporate. The reason: They wanted to receive the legal benefits that are available only to a corporation or a limited liability company (LLC) and not to a partnership or sole proprietorship.
By incorporating, they created a separate legal entity that protected them from personal liability. If someone were to start a lawsuit because a business debt was unpaid, Joe and Sue wouldn't have to worry about their own personal assets—their homes, cars and bank accounts. Only the assets of their studio itself would be at risk.
The same thing would be true if a client were injured through an employee's negligence (imagine the potential accidents of an on-location or even studio shoot). Only the corporation's assets would be exposed if there were a judgment for an accident not covered by insurance.
So it was a happy day when Joe and Sue left their lawyer's office with the Articles of Incorporation and corporate record book for their newly created company. Fortunately, their lawyer also gave them something equally valuable to take with them: some simple guidelines for preserving the benefits of incorporation.
It's amazing how many businesspeople go to the trouble of establishing a corporation or LLC, but fail to follow up properly. They increase the risk that creditors and others may be able to "pierce the corporate veil" and seize the personal assets of the owners.
To help you avoid such problems, here are some suggestions for protecting your corporate or LLC status. Many of these suggestions are based on the principle that a corporation or LLC is a legal entity that is separate from its owners and employees. To enjoy the legal benefits of having a corporation or LLC, you must carefully maintain that separateness. You must always make it clear that you're conducting business as an agent of the corporation (in this case your photography studio) and not as an individual.
The following pointers are worth keeping in mind:
1. Business Name. Use the full and correct name of your corporation or LLC in correspondence and contracts. If your corporate name is J and S Photography Inc., don't leave out the “Inc.” unless you've filed an assumed name or fictitious name certificate with the appropriate governmental authorities.
2. Banking. Maintain a separate bank account for your corporation or LLC. Have the company’s name printed on all checks. Be careful not to mix business funds with your own personal funds.
3. Signatures. Sign documents and letters as an officer of the company. For example, a corporate contract should be signed this way:
J AND S PHOTOGRAPHY, INC., a Michigan corporation
Joseph Anderson, President
4. Property Transfers. If a corporate shareholder or LLC member transfers property to your company (such as a computer, equipment or furniture), formally document the transfer by a bill of sale or an assignment.
5. Leases. If a shareholder leases a car, building or other property to your corporation, the board of directors should approve the transaction, and a lease should be signed.
6. Loans. Sign promissory notes if you loan money to your corporation or LLC, or if you borrow money from it.
7. Employment. If a shareholder or member is to be hired by the corporation or LLC as an employee or an independent contractor, enter into a written contract. In the case of a corporation, have the board of directors adopt a resolution approving this action.
8. Taxes. Make sure your company pays federal and state withholding taxes promptly. Officers, directors and principal employees of closely-held companies may be personally liable for payment of withheld taxes if the company runs out of funds to pay these obligations.
9. Records. Keep your company record book up to date. If your business is a corporation, write up minutes or resolutions at least annually for shareholders and directors.
10. Co-Signing. If your company borrows money from a bank and you're asked to co-sign a promissory note, be sure that you fully understand the extent of your personal liability in case the company defaults.
11. Annual Reports. File your annual report on time with the proper state authorities. Otherwise, you may face fines and even dissolution of your corporation or LLC.
12. S Corporation. If you elect S Corporation status for your corporation to avoid a corporate income tax, be aware that the election (IRS form 2553) must be filed by the 15th day of the third month of your tax year.
13. Insurance. Check with your insurance agent to make sure you have
Public liability coverage not only for property owned by the company, but also for property leased to the company and for your own property, which may informally be used for company business.
With a little extra effort and a small amount of paperwork, you can help preserve the benefits for which you formed a corporation or LLC.
Fred S. Steingold practices law in Ann Arbor, Michigan. He is the author of Legal Guide for Starting and Running a Small Business and The Employer's Legal Handbook published by Nolo. Legal strategies may vary depending on the state in which you live and the specifics of your situation. See your lawyer for legal advice.