Corporation BasicsForming a corporation almost guarantees that your personal assets are protected from seizure by business creditors, but running one takes some attention!
No doubt you've heard that forming a corporation provides "limited liability". This means that it limits your personal liability for business debts. What you may not know is that if you do not keep your corporation paperwork in order, creditors can do what's known as "pierce the corporate veil" and come after your personal home, car and money.
You see, there's more to running a corporation than filing a few papers. You need to keep detailed records to support your corporate tax return, and you have to follow corporate paperwork rules in order to maintain your limited liability.
Understanding Limited Personal Liability
Here's how limited liability works. Suppose a court judgment is entered against your corporation saying that it owes a creditor $10,000. Normally, neither the creditor or the courts can force you to use your personal assets, such as your house or savings account, to pay the debt. This is because only corporate assets have to be used to pay its business debts.
Losing Limited Liability ProtectionThere are some circumstances in which limited liability will not protect your personal assets. You can be held liable if you:
- personally and directly injure another person
- personally guarantee a loan or other business obligation, on which the corporation defaults
- fail to deposit employee withholding taxes
- purposely do something that defrauds or injures the corporation or someone else
- commingle the corporation's business affairs with your personal affairs.
Commingling your personal affairs with the corporation's can have very serious consequences. Depending upon the situation, a court could rule that the corporation does not exist; that its owners are doing business as individuals who are personally liable for their acts. This might happen if you fail to follow routine corporate formalities such as:
- not adequately capitalizing the corporation
- not formally issuing stock to the founding shareholders
- not regularly holding meetings of directors and shareholders
- not keeping business records and transactions separate from those of the owners.
To help assure that you keep your corporate status intact, be sure that you do all of the following:
- hold annual shareholder and director's meetings
- keep minutes of shareholder and director's major decisions
- make sure that corporate officers and directors sign documents in the name of the corporation
- maintain separate bank accounts from their owners
- keep detailed financial records, and
- file a separate corporate income tax return.
If you take the time to set up your corporation correctly, and pay attention to the details of running the corporation, you should not have to worry about losing your corporate status or the ample tax breaks that owning a corporation provides for you. |