Starting a new business is almost like having a baby. There is a lot of work, a lot of pain, and a lot of sacrifice. So, once that “baby” is “born,” business owners feel pride and a sense of ownership - and that is where they get themselves into trouble.
Your business is not your baby. It is your grandma.
Your grandma, unlike a baby, has her own bank account, her own assets, and her own rights. If you were responsible for managing her finances, you wouldn’t use her credit card to purchase a mountain bike for yourself. If you were responsible for managing her life, you wouldn’t put her in harm’s way by surrounding her with people who would abuse her. And, if you were responsible for holding her property, you wouldn’t sell it and keep the cash for yourself. However, that is exactly what I see business owners do. Every. Single. Day.
As a business attorney, I hear entrepreneurs say things like, “but it’s my business” and “I am the only owner.” They feel that this gives them the right to manage the business how they see fit. In some ways, this is true. Yes, you can choose the name and the logo and the employees. You can even define the mission, vision, values, and products/services that are sold. However, you cannot treat your business as, simply, an extension of yourself. If you do, you are putting your business and yourself at risk.
LLC business owners are the worst offenders.
The flexibility and tax shelter that limited liability companies afford their owners make them a very attractive entity for many entrepreneurs. Unfortunately, these same benefits are also the reason many business owners make major mistakes. They assume that, just because the entity is formed with the Arizona Corporation Commission, the business will protect the owner(s) from any and all liability. But, that isn't true. Forming the entity, pursuant to statute is the first of many steps that are necessary to ensure liability protection. Below is a non-exhaustive list of the actions that all business owners should be doing TODAY to maintain as much liability protection as possible:
Open a separate bank account under the company's name;
Get a separate EIN;
Do not commingle personal funds/expenses with company funds/expenses;
Draft and execute an Operating Agreement;
Sign any business contracts on behalf of the business, not personally;
Adequately capitalize the business;
I always include a recommendation, regarding insurance. Even when operated perfectly, being in business puts a target on your back and you can never be fully insulated from liability. Insurance may help.
The repercussions of not following, at a minimum, the suggestions above may open you and your business up to liability under a legal concept known as Piercing the Corporate Veil. Essentially, the outcome of a court finding that the corporate veil has been pierced is that all of your (and possibly your spouse's) personal assets can be used to settle debts, judgments, and other liabilities of the business.
Business ownership is messy and there is a lot of juggling involved. So, it is understandable why so many business owners make these mistakes. The next time you are wondering whether the decision you made for your business was the right thing to do, just ask yourself, "Would I do this to grandma?"
Megan Porth is the owner and managing attorney at Your Contract Shop. Megan was born and raised around entrepreneurs and business people. From a very young age, she was attending networking events, strategic planning meetings, and marketing seminars. Her passion for helping businesses grow inspired her to go to law school, where she graduated with honors. She currently owns her own business consulting firm in addition to being a practicing business law attorney.
Megan Porth is only licensed in Arizona. Any other work done through Your Contract Shop outside of Arizona will be done only with attorneys who are licensed or authorized to practice in that state.
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