One of the biggest misconceptions for small business owners is that starting a corporation gives them legal protection against lawsuits and asset forfeiture. While it is true that an online company can do your incorporation or form an LLC for you, this only creates the company on paper and if it is not followed up on in the proper manner, your corporation can be legally disregarded.
In the State of California (and most other states) there is a legal doctrine called the “Alter Ego” doctrine, also known as “piercing the corporate veil.” Complicated terms, for a simple principle: if your business is not functioning as a true corporation or limited liability company, a court can disregard the corporate form and find that the business is actually just you (or even a group of people) and not actually a true corporation. This allows creditors or people suing the company to try and receive a judgment that can be satisfied out of your personal assets.
Here is a list of things to keep in mind about running a corporation:
- Have you been advised as to the tax differences between a partnership, a sole proprietorship, an LLC, or a Corporation?
- Are your insurance policies in the name of the business or your own name?
- Do you have separate bank accounts used strictly for the business?
- Do you keep good corporate records?
- Do you have regular board meetings?
- Have you issued your stock certificates if you are a corporation?
- Do you have bylaws or an operating agreement?
- Have your filed your yearly statement of information?
- Do you have workmen’s compensation insurance in the name of the business?
- Do you have employee policies and procedures?
- Do you have an accountant who is skilled in corporate returns?
If the answers to most of the questions above are “no” then you have a real issue with whether or not your corporation is giving you the protection you think it is.
I strongly recommend that all business owners spend the time with an attorney to talk through their business practices and find a knowledgeable accountant. The up-front investment is worth it to make sure that your corporation is actually giving you the protection you need.