|Don't Make These Mistakes With Your LLC or Corporation
A business entity can provide personal liability protection for its owners. The problem is that many people
start business without proper instruction on how to run and manage agreements between parties, agreements with
customers, internal paperwork, cash controls, voting rules, state and Federal reporting requirements and a host of
In fact, we have found between 20 to 25 actions, behaviors, or neglected tasks which commonly cause a business
structure to be forfeited and can result in personal liability for the owner or owners.
Here are 5 of them:
- USING THE BUSINESS FOR FRAUDULENT ACTIVITIES: YOU CANNOT, SHOULD NOT, AND SHALL NOT USE YOUR BUSINESS TO
CHEAT OR DEFRAUD! For example, John Smith gathers money from investors claiming that he will develop a new product
for his company. He never had planned to use this money for product development. He is sued by the investors, but
John claims that his personal assets are protected since he was acting as the president of his limited liability
company. No court will honor the limited liability company since fraud was involved. His personal assets and
business assets will be at risk.
You may think that since this is an egregious example, it won't ever happen to you. However consider the fact that
many deals struck with the so-called 'motivated sellers' could give rise to a lawsuit under your state's Deceptive
Trade Practices Act (DTPA) or similar statute. Sometimes the line is not so clear. One bit of wisdom is to make
sure that your agreements are fair:
- You also can't be wholly unfair or flagrantly one-sided when dealing with customers. A court can always look
at a one sided transaction and either decide against you. Even worse a judge could declare that you are using the
business to promote unfair dealings. This is bad news for you!
- ASK YOURSELF: Would you want to be the buyer/customer on the other end of your deal? Despite popular conception
you can structure 'win-win' deals with motivated sellers and make money. Ever hear of karma? Everything you do to
or for another person will one day be done to or for you…so be fair!
- FAILURE TO RESPECT THE BUSINESS AS SEPARATE FROM ITS OWNERS. YOU SHALL NOT MIX FUNDS FROM BUSINESS ACCOUNTS WITH
YOUR PERSONAL FUNDS, ACCOUNTS, ETC. DO NOT USE COMPANY MONEY TO BUY PERSONAL ASSETS, GROCERIES, ETC. Simply put, if
you do any of these things routinely (or perhaps only once) then your business structure is not likely to hold up
in court. If you think this is another easy one…then WATCH OUT, because there are other more complex issues
relating to the use of business and personal assets in the business. For more information see some of our
- INSUFFICIENT CAPITALIZATION: THE FAILURE TO PROPERLY CAPITALIZE THE BUSINESS. IN OTHER WORDS, A LACK OF
RESERVES AND/OR INSURANCE COVERAGE. If your business does not have enough capital and/or insurance to cover
operating expenses and potential liabilities then a state court will likely 'pierce' the business entity and hold
the owners personally liable. Why would a court do this? The reason is to 'find the money'. Your business must
have enough insurance and/or savings to cover expenses, liabilities, and obligations. The amount of capitalization
generally refers to the total value of assets (equipment, cash, etc.) in the company and the amount of insurance
coverage. This is another COMPLEX area because you may need more or less 'capitalization' based on your business
type. A general rule is: The more you deal with the public, the generally the greater your required level of capital.
- FORGETTING TO FILE STATE REPORTS - Your secretary of state's office will require you to keep up with reports
and state taxes (sometimes called franchise taxes and/or business privilege taxes). If you don't keep up with
these reports and/or taxes (even if nominal amounts are owed) your business privileges will likely be revoked.
Guess what privilege goes first?: The personal liability protection.
- OTHER FORMALITIES - These include meetings, paperwork, required records, proper roles and obligations among
the parties, and transfers of ownership interests, and more. It is very rare that we see full step-by-step and
easy-to-follow details on creating 'iron-clad' records in these areas. For state liability protection and the
ability to satisfy IRS auditors you need to understand these rules!
The list does not stop here, because we have found between 20 to 25 areas which are common traps for the business
owner. While we have covered 5, many of the others are very easy to miss but just as important. Please make
sure you get proper instruction on how to run your business entity after it is created! The true 'lost art' is
learning how to maintain the protection of your LLC or corporation.
To learn more about which entity may be best for you and how to create, run, and maintain an 'iron clad' LLC or
corporation, you don't need a grant from the King or Queen…but you should see Mr. Barazandeh's,
Incorporate for Wealth ™ and
Wealth Building LLC ™
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