I love to work with entrepreneurs. It is impressive to watch an idea turn into a conversation, a business pitch, and finally, a fully-fledged enterprise. One of my favorite things about being an attorney is that occasionally I get to be a part of that process.
Many successful entrepreneurs instinctively understand the importance of limited liability. Doing business through an entity is critical. Corporations and limited liability companies (LLCs) are the most common examples of the entities that new entrepreneurs gravitate toward when they start a business.
Piercing the Corporate Veil
But a business entity should not be created and then forgotten. A business entity needs a regular check-up, just like you do.
Entrepreneurs are typically focused on growing a business, and rightly so. Product development and new services generate revenue and growth; corporate minute books and board resolutions do not. But the latter are still important.
“Piercing the corporate veil” is a term that courts use to disregard a business entity. This designation allows the courts to attach personal liability to the owner or owners of a business entity. It can happen to a corporation or an LLC. It is rare, but it does happen. It’s a doomsday scenario that can result in a business owner facing unlimited liability from a litigant.
The laws on business entities vary from state to state (and this is not an exhaustive list), but here are two points that you should keep an eye on to avoid a scenario in which a court would pierce the corporate veil of your entity.
Business Entity as a Separate Financial Concern
It should go without saying that your new business needs a bank account in the business entity’s name. I know going to a bank to open an account is only marginally more pleasant than having a phone call with your attorney or paying your taxes. But it needs to happen.
If you take the time to create a corporation or an LLC, you should take the time to avoid co-mingling your business funds with your personal funds in a single bank account. Concerns about “piercing the corporate veil” aside, in a typical scenario with limited personal liability, you want to be able to draw a clear line between what you own personally and what your company owns.
In that vein, if you have a new business, the odds are that you will need financing at some point. So, if you want a loan from a bank or if you want to sell an equity stake to an angel investor or a venture capitalist, you need to have separate accounts and pristine bookkeeping.
No venture capitalist will buy a stake in your company if it is unclear whether the investment will pay for a new product line or your personal trip to the Bahamas.
Observing Corporate Formalities
The type of “corporate formalities” you will observe will depend on the type of entity that you have chosen to form. Generally, an LLC will have fewer formal requirements than a traditional corporation.
But regardless of your situation, it is important to go through the exercise. For example, if you have a corporation, you should appoint an officer (perhaps a president) to act on behalf of your corporation. The officer should be appointed according to the governing documents of the corporation.
But what if, for example, you are the only shareholder in your corporation? Do you hold a shareholder meeting with yourself where you elect yourself to the corporation’s board? And then, later that day, as the only board member, do you hold a board meeting with yourself to appoint yourself president of the corporation? Isn’t that a little ridiculous?
Yes, it is a little ridiculous. Welcome to the life of an attorney.
But remember, the goal is to be able to stand in front of a court and explain to a judge why a piece of paper that says “corporation” should stop someone who slipped outside your office from taking your house, your car, and junior’s college fund.
That means you need to observe the formalities. Even in a single-member LLC, it may be beneficial to adopt resolutions to approve major milestones (e.g., a new office lease or a contract with a new customer).
As an added benefit, when your new business grows into a fully-fledged enterprise with multiple investors, employees, etc., it will be easier to manage your business if you already understand how the formalities work. They exist for a reason. Eventually, you won’t be able to do everything, and you will need to sign resolutions to direct your employees and corporate officers to act on your business’s behalf.
Preferably, you will do this from a beach somewhere.
Remember, if you ignore your business entity, courts will be more likely to do the same. Each business entity is different. I mentioned corporations and LLCs, but there are also limited partnerships, and limited liability partnerships.
Even corporations can be broken into categories. For example, do you have a C-corporation or an S-corporation? Do you have a “professional” or a “nonprofessional” corporation?
Each state will have different business entities and different requirements. But if you need a hand in navigating your entity check-up, help is just a phone call away. Please reach out to a member of our business law team or contact the office directly at 215.362.2474.
The content provided in this article is for informational purposes and should not be relied on as legal advice. If you have questions on the topics discussed herein, you should consult an attorney. This article should not be construed as creating an attorney-client relationship.
The author disclaims any responsibility for any particular matter that affects your specific situation. Moreover, the content in this article may be dated or non-comprehensive, and the author is under no obligation to update the information included herein.
Copyright © 2022, by Celso Lucas Leite, Jr. All rights reserved. This article or parts of it may not be reproduced in any form without permission in writing from the author, except that a reviewer may quote brief passages in a review.
Celso Lucas Leite, Jr., Esq.
Celso is an ambitious attorney with a passion for helping local businesses. His practice areas include Corporate Law, Business Planning, Municipal Law, Commercial Litigation and Real Estate Law. Celso attended Villanova University, where he majored in finance and co-majored in real estate. With an understanding that business follows the constraints of law, he chose to attend Villanova University Charles Widger School of Law.