I received a call recently from a woman who was thinking of starting a home-based business. She had planned initially to operate as a sole proprietor for simplicity’s sake. Then she read an article about the legal protection that limited liability companies offer. Talk about dodging a bullet.
Operating a business as a sole proprietorship rarely makes sense because your personal assets are fully exposed to potentially unlimited business liability. For that reason alone, if you are starting a business, you should consider operating as a North Carolina limited liability company instead.
In fact, limited liability companies are the most popular type of legal entity in use today. A large reason behind their popularity is that if formed and maintained properly, a limited liability company can shield your personal assets from business debts and other potential liabilities. If maintained improperly, however, this protection may fail. When that happens, lawyers say that the “corporate shield” or “corporate veil” has been “pierced,” and personal assets become exposed to business debts.
To minimize the risk of having your corporate veil pierced, there are some business best practices known as “corporate formalities” that you should observe. Examples of corporate formalities that you would be wise to employ consistently in running your business include:
– Establish a company bank account and avoid commingling company funds with your personal funds.
– Maintain complete and up-to-date company records.
– Hold periodic meetings, especially annual meetings, and keep a detailed record of the minutes.
– Put major company actions to a vote and keep a record of the results.
– Operate properly through directors and officers, members and managers, etc.
– List the company name on all contracts, leases, and other documents.
– Sign on behalf of the company in your official capacity rather than in your personal name.
If ever sued, the more corporate formalities you follow, the greater the likelihood that your limited liability company withstands the challenge and your personal assets remain protected. And that’s exactly why limited liability companies are better than sole proprietorships.
If you have questions concerning this blog post, feel free to contact Allen at (704) 887-4944 or ars@starrettlawfirm.com.
13850 Ballantyne Corporate Place, Suite 500
Charlotte, NC 28277
(704) 887-4944
www.starrettlawfirm.com
Disclaimer: Our firm published this article for general guidance and educational purposes only. Contact a licensed attorney in your state for specific legal advice.
