Every week, we get calls from prospective clients who are looking to organize an entity to hold either an operating business or assets. They're typically interested in creating a corporation or a limited liability company, and real estate is just one example of the type of company we hear from.
Why are these calls so frequent? Well, many prospective clients have heard that by conducting a business or holding assets as an entity, business owners are effectively insulated from personal liability for any business-related claims that might arise. And we can confirm that yes, this notion is true.
But there is a major caveat that isn't talked about as much, though it really should be. What many folks don't realize is that in order to use an entity to insulate themselves from personal liability, there are certain formalities and standards that absolutely must be met.
For instance, corporate books and records must be maintained impeccably and separate bank accounts need to be in place for the owner and the business, respectively. Unfortunately, we find that so many prospective clients who want to form an entity are not following these rules of corporate conduct. And that isn't just a minor faux pas--it could undermine protective efforts, opening the door to an eventual claimant who's looking to "pierce the corporate veil." If successful in proving that the entity and the owner aren't so separate, a claimant could penetrate the entity and reach the owner with their legal complaint. Then an owner's weighty personal liability-the whole reason for establishing an entity in the first place-can loom large.
So for these and other reasons, our best advice to anyone looking to form an entity is to be sure to maintain corporate books and records and observe corporate formalities. Otherwise, the entity cannot accomplish its purpose: protecting the owner.
But don't get too stressed about this. Because as serious as it is, help is well within reach. At Calkins Law Firm our background in business law and expertise in helping business owners make smart and responsible decisions are always on tap.
So reach out today--talk with our team about how best to form an entity, and get your proverbial ounce of protection. Or, if you've already been through this and need to remedy a situation gone wrong, we stock pounds of cure, too. Either way, we're here for you.