Whether you formed a Limited Liability Company or an S-Corporation, aside from the tax advantages, chances are you incorporated with the purpose of warding off personal liability in the event that your business gets sued.
But did you know that the liability protection afforded by incorporation is not ironclad?
If a plaintiff can show that a corporation exists for fraudulent purposes, or that it is indistinguishable from its owners, courts will "pierce the corporate veil" and hold those owners personally liable.
Now that you've incorporated, your goal is to preserve the corporate veil such that the company will be held solely liable for any damages.
To accomplish this goal, you should do the following:
- Follow corporate formalities, such as holding yearly meetings with elections; keeping meeting minutes; maintaining corporate records; and signing documents on behalf of the corporation.
- Separate your finances such that there is no intermingling of assets between the corporation and shareholder.
- Make business-minded financial decisions, such as keeping the company properly capitalized and not over-concentrating or siphoning funds.
- Pay dividends in situations where it makes financial sense.
- Avoid personal dealings that are carried out through the corporation.
- Maintain honest communication with other corporate officers and shareholders, who should all have functioning roles.
As this list demonstrates, the trick to maintaining the corporate veil is absolving yourself of any personal attachment to your business. You are no longer a sole proprietor, and therefore must act as though you were brought in to run new corporate entity.