We encourage business owners to form formal business structures like Limited Liability Companies and Corporations in order to protect their personal assets from business debts and creditors. However, simply filing the Articles of Organization or Articles of Incorporation with the Secretary of State’s office is not enough. If you do not keep your business and personal finances and operations separate, a court could potentially find that, while there was an apparent separation of the two, in reality, the individual was using his or her business for their own personal affairs and order that the two are not really separate. If this happens, a court could satisfy a business debt or judgment with your own personal assets.
What can you do to avoid this? First, the easiest thing to do is to keep your finances separate. Open a business bank account and only use that account for business income and expenses. Do not pay for personal items out of this account, even if you’re going to reimburse yourself. Keep good records. Do not take liberties with categorizing something as a business expense when it’s really a personal expense. Use a trustworthy business accountant. It is not worth the risk of stretching your deductions to pay less taxes (if it’s not really a business expense) because you’re opening yourself up to personal liability. Second, sign all of your contracts as member of your LLC. Don’t sign them as you personally.
Third, if you own a corporation, you have to comply with the North Carolina Business Corporation Act. You are required to have bylaws, even if you are the sole owner. You are required to vote and install a Board of Directors. If you want to own your corporation, the board (which may just be comprised of you) needs to issue you shares so that there’s a record that you own the business and that you’re not simply just a director or the president of the business. Directors need to keep thorough records of annual meetings and need to vote on business decisions (even if it is just yourself voting). If you do not have robust corporate records, you risk having a creditor ask a court to “pierce the corporate veil” … meaning that a court may find you and your corporation one of the same, and you may be ordered to satisfy corporate debts and judgments with your personal assets, defeating one of the main purposes of owning a corporation. If you or someone you know on a business and you believe that the books and records need to be improved, please give us a call.
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