If you’ve incorporated your business, either on your own or through your accountant, you probably feel comfortable knowing that your personal assets are protected from the debts and liabilities of your business. In actuality, filing Articles of Incorporation with the Secretary of State is just the first step in establishing what’s known as the “corporate shield.”
Many business owners are surprised to learn, and they often learn too late, that their personal assets are not necessarily protected by their corporation. This false sense of security can be quite dangerous. If the business became the subject of a lawsuit, their personal assets could be at stake.
According to attorney Kevin M. Lyons, “while there are a number of ways a business owner could lose the “corporate shield” protection, successfully ‘piercing the corporate veil’ typically occurs when the business owner failed to maintain the corporation’s separate and distinct identity from the owner or another business.” The most common ways a corporation can lose its corporate shield or veil are:
- Failure to file an Annual Report. If an Annual Report is not filed in a timely manner, the corporation can be involuntarily dissolved by the Illinois Secretary of State after 90 days.
- Failure to document Shareholder Minutes and Directors’ Actions. These documents are part of a standard record-keeping protocol for any corporation; owners should maintain a Record Book for the business.
- Under-capitalization of the corporation. If you start a corporation with a small amount of money and quickly develop liabilities way beyond what has been invested in the business, the corporation may be deemed “undercapitalized” and subject topiercing by a creditor.
- Failure to separate personal and business assets and liabilities or failure to separate assets and liabilities between two business. Commingling personal and corporate assets and liabilities puts your personal assets at risk for the liabilities of your corporation. So, the name of the game here is avoid using your business accounts for personal matters and visa versa. If you have more than one business, do not use the assets from one business to pay off the liabilities of the other business without proper documentation. Many times, shareholders find their personal assets exposed to a creditor when proper corporate documentation, such as a promissory note, would have maintained the corporate shield.
It’s best to have an attorney set up your corporation correctly from the beginning. Lyons Law Group in Downers Grove specializes in Corporate and Business Law.
For more information, contact Lyons Law Group, located at 5333 Main Street. Call (630) 852-2529.