Many business owners choose to incorporate their business to avoid personal liability for the debts and liabilities of the business. When done properly, the business is a separate and distinct entity from its owners. However, if the owners are not careful with certain corporate formalities and fail to adequately capitalize the company, a third party may be able to “pierce the corporate veil,” which would shatter the protection of the corporate structure. To the extent the corporate veil is pierced, the owners may be held personally liable for any debts and liabilities of the company.
To make sure this does not happen to you, Afshin Hakim, a leading business attorney in Los Angeles, will work with you and your business to ensure that you are in compliance. The following are a few of the mistakes businesses make, and how you can avoid these pitfalls.
Undercapitalization
One factor the courts will consider is whether the business is undercapitalized, meaning it does not have enough money in its bank account to effectively function. To avoid this situation, ensure that your business is adequately capitalized at its inception and is not taking on liabilities in excess of the income coming in. While undercapitalization alone may not pierce the corporate veil, it is a factor the court will consider when other questionable practices are present.
Ignoring Corporate Formalities
The formalities of running a business exist for a reason, whether your business is a limited liability company or a corporation. It is a big red flag to ignore these requirements. Formalities that may apply to your business include holding regular board meetings, generating annual reports, and maintaining separate financial bank accounts and books and records. Check with a business attorney to ensure you are following all the requirements for your particular type of business entity.
Commingling Assets
It is essential to keep your personal and business assets separate. It is recommended that you maintain a separate bank account for your business, and ensure that all business assets are titled in the business name alone. The funds and assets of the business should never be used for personal purposes.
Fraud
Courts will also consider if a business is being used to shield the wrongdoing of individuals, particularly if this amounts to fraud. For instance, if you have a pending lawsuit against you and you create a company to transfer all your personal assets to avoid having to pay a judgment, this would most likely provide a third party with a fraud claim and the ability to pierce the corporate veil.
To Secure Expert Legal Protection for Your Business, Call Hakim Law Group Today
For further information about protecting your personal assets and your company, contact the highly reputable and experienced business attorney in Los Angeles, Afshin Hakim of Hakim Law Group, today at 310.993.2203, or complete our online form.
