A Few Reminders in Operating Your Business by Jon Austin

In our business practice, we have the privilege of assisting our clients as they pursue their dreams. Dreams may involve a primary vocation, an alternative source of income, a charitable endeavor, or even a venture for their family to grow and learn together. An exciting part of our work is helping our clients leverage and protect their investment of time and capital in such ventures. This is achieved at the outset through the wise selection of the business entity and the appropriate structure within that entity for ownership and management. This article is meant to provide you with a few simple, yet important, reminders in operating your business.

As you may know, one of the foundational reasons for creating a business under state law, such as a limited liability company or a corporation, is to provide the owners with limited liability protection. Forming a business under state law is a relatively simple process. Oftentimes business owners incorrectly assume profitable operation of the business is all that is left to do after formation. However, there are other important housekeeping matters the owners and officers should be mindful of in operating their business. The cumulative effect of failing to operate one’s business properly could lead a court to ignore a business’ liability shield and hold the owners personally liable for the company’s obligations. Although business owners routinely subject the value in their business to the risks in the marketplace, they would be shocked to find their personal worth (homes, cars, personal investments, etc.) at risk for liabilities arising from the business operations.

A business, such as a corporation or limited liability company, is a distinct legal entity separate from its owners. As such, a company can own property, enter into contracts and other transactional arrangements, and sue or be sued. If there is a reason for a company to be formed as a separate legal entity, it is fundamentally important for the owners to operate it as such. In other words, you should hold yourself out to the public as a separate business entity, operate your company pursuant to the terms of its governing documents (such as its bylaws or an operating agreement), keep accurate books and records, and interact with the entity and the other principals in an arm’s length manner. In addition, all leases, contracts and other types of agreements should be made in the business name and all checks should be signed in the business name. In each instance, not only should the company name appear, but also the respective title of the person signing for the business, i.e., “Jon Austin, Manager.”

Additionally, any and all assets you are currently using or later acquire for company purposes should be titled in the company’s name in order to utilize the limited liability protection afforded the business under state law. Assets titled in one or more of the individual owners’ names may expose the owners to personal liability. A practical application of this recommendation is establishing a separate bank account for your business. This account should be titled in the entity’s name and used solely for business expenses. Doing so will be of great assistance in your regular accounting practices as well as in avoiding the commingling of personal and business funds. Likewise, the owners should maintain sufficient personal funds so their personal expenditures and obligations are made from their individual accounts rather than the company’s accounts.

Remember, the benefit and control you hold over your assets will be different if you transfer these assets to your business. In other words, as the sole and individual owner of your personal assets, generally you can manage your assets as you please and without consideration of other’s interests. However, after the assets become property of your business, you and any other owners are governed by the terms of the governing document and state law. In addition, owners of businesses generally have certain fiduciary duties and responsibilities to one another in managing the company and its assets, duties and responsibilities which you previously did not have as an individual.

Finally, as with any business venture, it is important to employ the assistance of both your attorney and certified public accountant in the ongoing operation of the business to ensure compliance with both state and federal requirements. Annual minutes are imperative for a corporation to establish it as a separate and distinct entity from its owners. Corporate management must be in the habit of preparing and executing corporate minutes, both for shareholders and the board of directors on an annual basis. Although other business entities, such as limited liability companies, may not be required to keep annual minutes, doing so will help demonstrate the company’s separate legal status from its owners. The company’s governing document, along with state law, should also be consulted to determine your entity’s additional annual requirements, including franchise taxes, annual certificates, etc.

Each of these reminders is vital to maintaining your company’s own distinct status, separate and apart from its owners. Needless to say, adhering to these formalities requires time and some effort, but the ounce of prevention assures you are maintaining proper business records. The absence of proper and complete business records could enable another party to argue the business structure is merely a sham, the “alter ego” of the individual owners, therefore the individual owners should be personally responsible for the obligations of the business. We encourage you to operate your business and maintain your business records in such a way as to achieve your dreams for your business.