When it comes to legal matters and liabilities your business may face, there must be a shield of separation in place to protect your personal assets and everything you have worked to accomplish in your business. It’s time to deploy the “corporate veil” – strategically leverage your business’ legal entity structure as a risk mitigation tool.
Part four of the series as Michelle Bomberger, the CEO and Managing Attorney at Equinox Business Law Group, shares how to gain a strategic advantage by leveraging legal entity structure as a risk mitigation tool. Watch Video
It can be hard to separate who we are personally from what we do professionally
As entrepreneurs and business owners, we put everything we have into the success of our business. Our time, capital, and relationships are put on the line to build something great.
So when it comes to legal matters and liabilities your business may face, there must be a shield of separation in place to protect your personal assets and everything you have worked to accomplish in your business.
This shield is legally termed the “corporate veil”. It’s when you strategically leverage your business’ legal entity structure to create a liability shield between your business liabilities and personal assets.
It’s no surprise that the very first question we get from people starting a business is what kind of legal entity will best protect them from personal loss and liability.
It’s not just a crucial question for the start, but for every level of your business change and growth. Do you have the proper entity structure in place? And are you taking full advantage of it?
As entrepreneurs, we go boldly into the unknown. Just like Captain Kirk in Star Trek. Whenever the starship U.S.S. Enterprise explored a new, unknown end of space, Kirk would tell the crew “shields up!” just in case of danger.
To use the business entity as a legal infrastructure tool that protects you from liability, it’s critical to know what mis-steps could “pierce the corporate veil”. Because even Kirk’s Enterprise could only withstand so many blasts from the Klingon warships.
Shields up! Three ways to leverage your business entity or structure as a risk mitigation tool
As a business owner, you should be aware of ways that you could inadvertently lose the benefit of the corporate veil:
1 – Put the right structure in place
The entity type you choose must be one that legally offers you protection from the liabilities of the business – typically a corporation or a limited liability company. With this structure, the owners are not responsible for the liabilities of the business. A sole proprietorship or partnership does not accomplish this liability protection.
2 – Put the structure to work by doing the work
To achieve the benefits of corporate liability protection, you must “respect the corporate form”. This means that you must satisfy the legal maintenance requirements including annual filings, meetings, and elections required by the law.
It also means that you take proactive steps to show that the business is not just an extension of your individual person. The business should have its own business financials, bank accounts, and formal decision making by those individuals elected to manage the business.
You must actually do these required things — or you risk a third party seeking to “pierce the corporate veil” and pursue the personal assets you’ve worked so hard to build. Compliance with the legal requirements can be difficult for smaller companies where the same people sit in all the seats – they are owners, directors, and officers. It feels weird to have separate meetings for each of these categories when it’s all the same people – and even harder when it’s just one person. The elections and meetings may seem meaningless — but they are essential for the corporate structure to serve its purpose of liability protection.
3 – Protect yourself from personal risk
What are you signing?
If you choose to personally guarantee an obligation of the company, you are intentionally putting your personal assets at risk. Some contracts – for example bank loans and leases – require the owners to individually guarantee the performance of the contract and the payments. If you choose to sign personally – not as an agent of the company – you are accepting personal liability and putting your personal assets at risk.
Are you in compliance?
Taxes, payroll, and regulatory compliance can create personal liability of the owners that are not insulated by the liability protection of the entity. As the owner, you are ultimately responsible for these compliance activities and are personally liable under certain statutes. Reliable internal processes help ensure legal and regulatory requirements are met and the owners’ risk is mitigated.
What if you make the wrong decision?
Owners can be held personally responsible for their own actions that are grossly negligent, fraudulent or illegal. Courts do provide wide latitude for owners acting as agents of the business under the “business judgement rule” which doesn’t penalize business management or owners from poor decision making. However, you will not be protected from intentional or illegal acts.
Bringing it all in balance
An entity with liability protection paired with strong governance and processes will give you a leg up – you will have the confidence to make risky decisions and knowing your personal assets are protected if a catastrophic liability arises and you have to close the business.
Not sure where your business stands?
Schedule a Business Health Consultation – A complimentary, one-on-one discussion with an experienced Equinox business lawyer to talk through areas of concern, strength, and risk. The meeting is extremely personalized, tailored to your business’s individual needs, challenges you may be facing, projects on the back burner, and any areas of your business that need more focused attention. Within a week, you’ll get a customized summary of recommendations based on your Business Health Assessment.